NCLT To Use Videocon Case As Precedent For Group Insolvency Cases
NCLT allows consolidation of insolvency proceedings for 13 Videocon Group firms. IBC currently lacks a group insolvency framework.
National Company Law Tribunal has allowed consolidation of insolvency proceedings for 13 Videocon Group entities, in a decision that would pave the way for faster resolution of debt in troubled conglomerates with multiple connected entities.
Group companies, cross-repayment obligations and heavy debt have hobbled insolvency proceedings of three large groups—Videocon Industries Ltd., IL&FS and Reliance Communications Ltd.
The Insolvency And Bankruptcy Code currently lacks a group insolvency framework. But this problem of ‘consolidation’ has cropped up sooner than expected and it’s so pressing that it cannot be avoided or deferred, NCLT’s Mumbai bench pointed out.
And so, the bench used its inherent powers under the NCLT rules and relied upon precedents in the U.K. and the U.S. to allow consolidation in the Videocon matter. It cited commonality of debt repayment obligations, management, assets and liabilities and interlacing of financial structure as the grounds for its decision.
Here are the key observations made by the NCLT:
Reasons For Allowing Consolidation
The Videocon order will act as precedent for similar group insolvency cases in the future. The tribunal relied upon the test—whether consolidation would yield more benefit than harm—while making the decision on consolidation and noted pre-existing and interlinking factors among the group companies: These were:
- Co-Obligor Structure Between Group Entities: The consortium of banks and financial institutions led by State Bank of India had extended rupee term loans to Videocon Group entities as a whole under an ‘obligator’ structure. Accordingly, the lenders had deemed each group entity under the agreement as a ‘co-obligor’, by virtue of which, each entity was bound together along with the other group entities towards the fulfillment of the loan obligations. The lenders had deemed all the group entities under the agreement as a ‘single economic unit’.
- Common Control And Directors: The family members of Venugopal Dhoot were promoters as well as directors in all the Videocon Group entities which established a common control, despite the fact that each entity had a separate legal existence.
- Common Assets And Liabilities: The Videocon Group companies operate under a linked structure where one group entity leased space or resources to the other.
- Operational, Financial And Existential Interdependence: The Videocon entities engaged in manufacturing, selling and distribution of electronic appliances under the common umbrella of the ‘Videocon’ brand, which established an operational interdependence among themselves. They also engaged in pooling of human resources and utilised the goodwill of the promoters for market outreach. This interlinked chain caused each group entity to rely on the other for its operations.
- Common Creditors, Lenders And Collateral: Lenders under the rupee term loan agreement were common for all the group entities which made them a single economic unit for the purpose of raising money from financial institutions.
In its petition against Videocon Group entities, SBI had sought directions from the NCLT for a substantive consolidation of the group entities solely for the purpose of insolvency process. SBI wanted:
- Consolidation of corporate debtors into a single insolvency resolution process.
- Consolidation of assets and liabilities of all entities under the proceedings.
- Elimination of intra-company debts after consolidation.
- Pooling of individual guarantees given by group companies.
- Constitution of a common Committee of Creditors and appointment of a common resolution professional with a common insolvency commencement date.
Allowing all these pleas, the NCLT approved the appointment of Mahendra Khandelwal as a common resolution professional for 13 group entities on a consolidated basis and ordered preparation of an information memorandum on the basis of a common balance sheet as on March 31, 2018.
Consolidation Is Discretionary
NCLT, however, kept two Videocon Group entities—KAIL Ltd. and Trend Electronics Ltd.—out of the consolidation because these firms have a strong case of functioning and paying back their dues to the lenders independently as they don’t have any operational dependence on the other group entities.
That indicates the tribunal would approve consolidation of insolvency proceedings on a discretionary basis considering the facts and circumstances of each case.