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The cross-border insolvency framework released for discussions encompasses coordination and cooperation among statutory authorities of different jurisdictions in respect of the insolvency proceedings of any single corporate debtor. With government proactively inviting constructive feedback from various interested parties, we would like to draw attention to the fact that most of the multi-national companies are holding their assets in foreign jurisdictions through host of subsidiary or associate companies which are distinct legal entities. Consequently, the commencement of insolvency proceedings in respect of any single company cannot be automatically extended to all its group companies under the proposed legal framework and this may be prejudicial to the interests of the stakeholders in one or the other company.
What is required is to promote effective group companies’ insolvency proceedings by way of substantive consolidation of companies within a group and allowing restructuring or liquidation of all the group’s assets and liabilities as though only one entity existed. This can be facilitated by permitting insolvency proceedings under single jurisdiction as may be designated by the statutory authorities of various group companies and concomitantly consolidating the creditors composition and voting procedures to represent the interests of the group as a whole. This latitude exists in some form or the other in some of the jurisdictions across the globe and even Chapter V of the EU Insolvency Regulations contains various rules for integrating the insolvency proceedings concerning group companies.
The foremost issue over here is how to form a group for the purpose of the insolvency proceedings as each company has to be managed in its own interest which are not subordinate to the interests of any other company. Hence the rules of group should only apply if there exists between different group entities a relationship of financial or commercial nature that makes the entities interdependent on each other in terms of business strategy and growth. However, this would not be the case if a company is holding controlling stake in another company as a standalone financial investment and the subsidiary company is not deriving any material support from its parent company. While forming the group it is important to align the intra-group relations towards a common interest and this should not distort the respective liabilities of concerned companies and the financial capacity of the group as a whole.
As a rule, the rights of creditors can only be exercisable against the company with which they have contracted, or against which they have a claim. There is no concept of general group liability and group liability can only exist when it flows from the law or the ambit of the creditors’ recourse has been widened. Hence, during insolvency proceedings, it is imperative to have contractually organized groups on voluntary basis in which respective duties and rights are agreed among group members have been explicitly mentioned thereby reducing the need for statutory credit protection. This would provide remedies in the group context by opening recourse to creditors against other group companies – parent company and other subsidiaries – in addition to recourse to debtor company.
Another area of concern relates to the extent to which group decisions – including decisions by controlling shareholders – could impose unfavorable transactions to subsidiaries, being transactions that reflect the interest of the group, or of its controlling shareholders, but not the financial or economic interest of the subsidiary. The only way to deal with this dilemma is to clearly state the principles relating to Related Party Transactions so that, in a group context, companies can take into account the interest of other group companies, or of a group as a whole. Such a regime on related party transactions would protect the interest of the shareholders and creditors of the subsidiaries in any group of companies.
A fundamental principle underpinning the insolvency proceedings for a group should be cooperation and coordination aimed at finding a solution that will leverage synergies across the group, to the benefit of all stakeholders and not run counter to the interests of creditors in each of the involved insolvency proceedings. A provision in the law obligating insolvency professionals of individual companies, under certain circumstances, to request for insolvency proceedings for a group of related companies as a single unit along with enumeration of protocols for dealing with the intra-group relationships would go a long way to streamline the insolvency proceedings for realizing maximum value of the assets.
The flexibility for preferring insolvency proceedings as a group would enable overcoming of the hurdles faced during the cross-border insolvency proceedings in particular and would also facilitate in preserving the value of various domestic companies carrying on the business through a network of special purpose vehicles or subsidiaries.