Consolidated CIRP in IBC: An Invention of NCLT Rule 11
Owais S. Khan
Final year Student, Government Law College, Mumbai
Introduction:
Recently, the Hon’ble Supreme Court (SC) in the GLAS Trust Company LLC vs. BYJU Raveendran & Ors. (2024) ibclaw.in 275 SC, popularly known as the Byju’s insolvency case, deliberated on the power of the National Company Law Tribunal (NCLT), the Adjudicating Authority under Insolvency and Bankruptcy Code, 2016 (IBC) and National Company Law Appellate Tribunal (NCLAT) to exercise inherent powers under Rule 11 of NCLT Rules and NCLAT Rules. The SC held that since the legal provisions and procedure for withdrawal of the Corporate Insolvency Resolution Process (CIRP) and settlement of claims are explicitly provided in the IBC and the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) regulations, 2016 (CIRP Regulations), recourse to Rule 11 was not warranted and subsequently set aside the NCLAT order.
However, there exists a less discussed and unique category of CIRP, which is an outcome of the adjudication of NCLT and NCLAT under Rule 11, as both IBC as well as the CIRP Regulations are reticent on the same. This is the Consolidated CIRP, which has been allowed by the NCLT and NCLAT in many cases. This article discusses the evolution of Consolidated CIRP under Rule 11, its mechanism and relevance in the IBC jurisprudence in the absence of any explicit legal authoritative statement on the same and its impact on the separate legal existence or corporate personalities of the companies.
Scope of ‘Inherent Power’ under Rule 11:
NCLT as well as NCLAT Rule 11 titled as ‘Inherent Powers’ authorizes the Tribunals to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal. Thus, the above rule is an open-ended statement, bestowing a higher degree of adjudicating power on the Tribunals. This empowers them to adjudicate on matters concerning Insolvency when the procedure for the same is not outlined in the IBC or associated Regulations. Discussing the inherent powers under the Civil Procedure Code, 1908 the SC in Ram Chand & Sugar Mills Pvt. Ltd vs. Kanhaiyalal Bhargava (1966 SCC OnLine SC 215) had held that if there are express provisions exhaustively covering a particular topic, no such power shall be exercised in respect of the said topic. However, nothing prevents the courts to use this power to make suitable orders to prevent the abuse of the process of the court. Similarly, in the Byju’s Insolvency case, the SC held that any deviation from the prescribed procedure must be justified by the Adjudicating authority.
The SC in the Ebix Singapore Pvt. Ltd. vs. CoC of Educomp Solutions Ltd. (2023) ibclaw.in 212 SC had held that exercise of jurisdiction under Rule 11 by the NCLT must be closely scrutinized to ensure a broader compliance with the insolvency framework. Thus, this judgement serves a guiding light to the tribunals in exercising this inherent power. Similarly, it has been held that approaching a civil court when there is no express provision outlined in IBC would result in the abuse of the Adjudicating authority to whose supervision the insolvency resolution has been entrusted in Liberty House Group Pvt. Ltd. vs. State Bank of India CA/ 724/ 2019 by NCLAT New Delhi
Thus, the above adjudications clearly highlight the scope of Rule 11 and Consolidated CIRP is one of the inventions of the Adjudicating Authority under Rule 11. In case of Consolidated CIRP, it can be construed that this power was fairly exercised to protect the interests of the creditors, enabling them to meet the ends of justice.
Mechanism of Consolidated CIRP:
Consolidated CIRP is a relatively novel mechanism in CIRP process. When the Corporate Debtors (CD) commits a default in repayment of loans, it is admitted in CIRP. At times, it is a possibility that multiple companies of the same group companies are admitted for the same. Thus, when the assets and liabilities of these companies are merged together in a single pool, Consolidation of CIRP takes place. Once the CIRP is consolidated, the Committee of Creditors (CoC) can formulate single Information Memorandum for the prospective resolution applicants, that shall comprise of the assets of all the CDs.
Similarly, as a regular commercial practice, the loans of the company are subject to a guarantee by its holding company or another group company. However, when the company commits a default in the repayment of loans, it is declared as a CD and subsequently admitted to the CIRP. By virtue of the invocation of guarantee undertaken by the holding or the group company, they are under an equal obligation to repay the loan taken by the CD to the creditors. This is clearly outlined from the definition of financial debt under IBC, which includes guarantee as a form of financial debt as well as by Sec. 128 of the Indian Contracts Act, 1872 which states that the liability of the surety (guarantor) surety is co-extensive with that of the principal debtor. Hence, the guarantors are called are called upon to repay this debt by the creditor. The failure by the guarantors to repay this debt and satisfy the guarantee subsequently results in their admission in the CIRP, and they too are classified as CD along with the Principal CD. Hence, more than one company is admitted to CIRP for the same loan. At this stage, the creditor or the consortium of the creditors as the case may be suggest the merging of the assets and liabilities of the principal debtor as well as the guarantors. This is another mechanism under which the consolidated CIRP is initiated. The Information Memorandum for the prospective resolution applicants, consists of the assets and liabilities of both, the principal debtor who became a CD owing to non- payment of loans and the guarantors who became a CD owing to their failure to satisfy the guarantee. Consolidated CIRP has been recognized in UK and US bankruptcy Laws under the doctrine of substantial consolidation. This consolidation works in favor of the creditors in maximizing the asset value of the group company, eliminating cross debts and also saving their time and money in adjudication, as multiple CIRP’s for the same debt is funneled to only one CIRP, which is the consolidated CIRP.
Consolidated CIRP was recognized for the first time in the State Bank of India vs. Videocon Industries Ltd. (2018) ibclaw.in 84 NCLT, wherein the NCLT, Mumbai laid down 15 yardsticks which shall be satisfied before arriving at any conclusion on Consolidation of CIRP. These included common control, common directors, common assets, common liabilities, inter-dependence, interlacing of finance, pooling of resources, co-existence for survival, intricate link of subsidiaries, inter-twined accounts, inter-looping of debts, singleness of economics of units, cross shareholding, inter dependence due to intertwined consolidated accounts, common pooling of resources, etc. This list was held to be a part of the elementary governing process. Similarly, the NCLAT in Oase Asis Pacific Ltd. vs. Axis Bank Ltd. (2021) ibclaw.in 138 NCLAT approved the consolidation of CIRP between the holding company and its two 100% subsidiary companies as all the three companies were undergoing CIRP and it was opined that the interlinkages and synergies between the companies would enable the holding company to remain a going concern.
However, the plea for consolidation by creditors has also been rejected by the Adjudicating Authority on manifold occasions. In Punjab National Bank vs. KSK Mahanadi Power Co. Ltd. (2021) ibclaw.in 653 NCLT it was held that Rule 11 under its limited jurisdiction cannot enable the Adjudicating Authority to direct consolidation of different CD. This highlights the fact, that absence of a direct reference regarding Consolidated CIRP, is surely creating ambiguity in case a possibility of consolidation arises, leaving the decision at the discretion of the Adjudication authority by virtue of Section 60(5) of IBC and Rule 11.
Impact on Holding- Subsidiary Relationship:
One of the most advantageous outcomes of incorporation and registration of company is the separate legal personality of the company, also referred to as the Corporate Personality. This principle has been recognized by the landmark case of Salomon vs. Salomon [1897] AC 22, providing a ‘corporate veil’ to the company. This veil remains unaffected even in a holding- subsidiary relationship between companies. This has been explicitly provided in the companies Act, 2013 as well in the landmark judgement of Vodafone International Holdings BV vs. Union of India, (2012) 6 SCC 613 wherein it was held that the holding company and the subsidiary company are two distinct legal persons.
However, in Jitendra Arora vs. Tek Chand, (2021) ibclaws.in 535 NCLAT, the NCLAT approved a consolidation of CIRP of a holding and a subsidiary company, as the two had intricate financial relationship, similar control by same set of directors and inter-related business. While approving the same, the NCLAT held that for successful resolution of the corporate debtor ‘piercing of the corporate veil’ of the two companies (holding and subsidiary) is absolute necessary and essential. Also, in Giriraj Enterprises Vs. Regen Powertech Pvt. Ltd., NCLAT held that Holding and Subsidiary Units would be regarded as single unit owing to the nature of the business activity. However, it also called out that Consolidation of CIRP is not an equity jurisdiction, but a legal principle intending maximization of the value of assets and value addition.
Similarly, in the Chitra Sharma vs. Union of India (2018) ibclaw.in 37 SC, the SC directed the holding company to deposit a sum of money before the court for insolvency proceedings against its subsidiary, even when the holding company was in default or rather involved in the said loan. This stand is in clear conflict with separate personality of the holding and subsidiary company.
The only argument in favour of the same can be degree of control that a holding company has over its subsidiary. When the holding company is in the Driver’s seat with a positive control over decision making as highlighted in the Subhkam Ventures vs. SEBI (Appeal 8 of 2009) by the Securtities Appellate Tribunal, there will be surely an element of dilution of personalities and thus consolidation of CIRP remains a viable solution.
Conclusion:
Consolidated CIRP is surely an outcome of a constructive judicial activism in commercial adjudication. It strives to serve the objectives of IBC on two grounds, first, ensuring the CD remains a going concern and second, protecting the interest of the creditors.
The question relating to the validity of the Consolidated CIRP has now reached the contours of the SC after the NCLAT allowed consolidation of Regen Powertech and its wholly owned subsidiary Regen Infra. SC has asked the CoC to file an appeal in the same. Consolidated CIRP as a practice, in most cases, is an outcome of Real Estate sector, along with Reverse CIRP, which has been upheld the SC. It remains to be seen how does the Apex court balances the separate personalities with the interest of the creditors.
