Home » Blog » Group Insolvency Mechanism

Group Insolvency Mechanism

By Amigos IAS

Why is it in the news?

  • RBI Governor Shaktikanta Das has advocated the establishment of a specific framework for the group insolvency mechanism to address challenges in the financial sector.

About Group Insolvency Mechanism

  • A legal framework designed to manage insolvency situations involving multiple companies within a corporate group.
  • Addresses the intricate interdependencies among these companies to prevent cascading failures during the resolution process.
  • Implemented or in development in developed countries such as the UK, US, and Japan.
  • UNCITRAL Model Law provides recommendations for countries to consider when designing their own group insolvency frameworks.

Need for a Specified Framework

  • The mechanism has been evolving under the guidance of Indian courts with the absence of a specified framework.
  • Current insolvency frameworks treat each company within a group as a separate entity, leading to difficulties when companies are financially interconnected.
  • A coordinated approach can maximize asset realization, improving creditor returns compared to separate proceedings for each company.
  • Identifies and rescues healthy companies within the group, preventing unnecessary job losses and economic disruption.
  • By preventing domino effects and resolving group insolvencies efficiently, the framework contributes to a more stable business environment.

Challenges

  • Challenges include addressing the intermingling of assets, devising a clear definition of a ‘group,’ and managing cross-border aspects.
  • The absence of a vibrant market for stressed assets in India limits the pool of prospective resolution applicants.
  • Safeguards are necessary to prevent companies from misusing the framework to their advantage or shielding assets from creditors.
  • Effective enforcement mechanisms are crucial for ensuring compliance with the framework and achieving desired outcomes.
About Insolvency and Bankruptcy Code (IBC)

·       Enacted in 2016 due to rising Non-Performing Assets (NPAs) and debt defaults.

·       IBC shifted from ‘Debtor-in-Possession’ to ‘Creditor-in-Control.’

·       Aims to revive financially stressed companies as going concerns, preserving jobs and maximizing value for creditors.

·       Aims to maximize asset realization and distribute proceeds to creditors to satisfy outstanding debts.

·       Financial creditors, operational creditors, and corporate debtors can trigger the Corporate Insolvency Resolution Process (CIRP).

Way Forward

  • Amendments to the Code should prioritize a financial creditor-led resolution framework in an overarching manner.
  • Developing a robust secondary market in loans is crucial for effective credit exposure management by lending institutions.

Signup for newsletter

Receive notifications straight into your inbox

Leave a comment

Item added to cart.
0 items - 0.00

Discover more from AMIGOS IAS

Subscribe now to keep reading and get access to the full archive.

Continue reading