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Friday, January 27, 2023

Group insolvency framework to be implemented in phases: expert panel

NEW DELHI: A framework for corporate group insolvency resolution is to be implemented in phases, according to initial consultations within the government.

The Insolvency and Bankruptcy Code (IBC) should provide a group insolvency framework that is voluntary, flexible and enabling in nature and can be introduced in phases, according to an expert committee that has studied the issue.

“In the first phase, only provisions governing the insolvency of domestic groups can be enacted,” says the report by the Cross-Border Insolvency Rules/Regulations Committee (CBIRC) led by former government secretary KP Krishnan, published by the Ministry of Foreign Affairs. Corporate. .

The United Nations model law on corporate group insolvency can be considered after cross-border single entity insolvency laws have been enacted and based on lessons learned from their implementation. Case law on substantive consolidation, that is, the combination of assets and liabilities of an insolvent group, is already developing under the IBC through case law, according to the report.

In the group insolvency framework under IBC, a broad and inclusive definition of ‘group’ should be provided to include a large number of corporate debtors within the scope of the framework.

The definition of ‘group’ may be based on the criteria of control and significant ownership, according to the report. This definition should be applicable to all entities that fall within the definition of ‘corporate debtor’ under the Code, ie companies and limited liability partnerships. The group insolvency framework may not apply to financial service providers notified under Section 227 of the Code, according to the report.

The group insolvency framework under the code should only apply to corporate debtors in respect of which a corporate insolvency resolution process or liquidation process is ongoing. The law will not apply to creditworthy members of the group, according to the report.

Insolvency laws, like general company law, normally respect the principle of separate legal personality for entities in a group and treat the assets and liabilities of each entity separately.

Consequently, the insolvency statutes in most jurisdictions treat the insolvency proceedings of each group entity separately. However, such legal frameworks can be ignorant of economic realities and practicalities. When group entities are significantly interrelated, it may be detrimental to value not to recognize such interrelationships in insolvency law, according to the report.

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