The cross-border insolvency framework released for discussions encompasses authorities across jurisdictions pertaining to insolvency proceedings of any single corporate debtor.
Currently several multinational companies (MNCs) hold their assets in foreign jurisdictions through subsidiaries which are distinct legal entities. Consequently, the commencement of insolvency proceedings for any single company cannot be extended to all its group companies under the proposed legal framework.
What is required is to promote effective group companies’ insolvency by consolidating companies within a group and allowing restructuring of the group’s assets and liabilities as though only one entity existed.
This is possible by permitting insolvency proceedings under single jurisdiction and consolidating creditors’ composition and voting procedures to represent interests of the group. 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.
The foremost issue is how to form a group for 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 a financial nature that makes the entities interdependent in terms of business strategy.
As a rule, the rights of creditors can only be exercised 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 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 unfavourable 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 consider interest of other group firms, or of a group.
A fundamental principle underpinning this should be coordination that will leverage synergies across the group and not run counter to the interests of creditors. A provision in the law obligating insolvency professionals of individual companies to request for insolvency proceedings for a group of related companies for dealing with the intra-group relationships can help realize maximum value of assets.
The flexibility for preferring insolvency proceedings as a group can help overcome hurdles faced during cross-border scenarios and preserve the value of domestic companies through a network of special purpose vehicles or subsidiaries.
*Ashutosh Agarwala is a senior adviser with Duff & Phelps, a global valuation and corporate finance adviser.