Friday, 27 November 2020

In the matter of Videocon Industries Limited & Ors. - Consolidation of Insolvency Proceedings of Group Companies.

NCLT Mumbai  (08.08.2019) in the matter of Videocon Industries Limited & Ors. [MA 1306 /2018 Ors. in CP No. 543/2018 & Ors.] AA consolidated the insolvency proceedings of 13 out of 15 group companies and observed;-

“Decisively, the above discussion has deciphered cases of this group into two categories. Rather it is absolutely necessary to place my view with humility that if at all a question of ‘ Group Insolvency’ is to be answered in such type of group of cases, then in that situation, a blanket view is not possible to declare that the entire Group is fit to be CONSOLIDATED simply being connected or controlled by common management.


Excerpts of the order;

# 1. There are as many as 15 applications, some are in favour of the ‘Consolidation’ and some are opposing the ‘Consolidation’ of insolvency process of the Videocon group Companies, therefore, a summary at the outset shall be useful to deal all of them in this combined order. It is also worth to mention at the beginning itself that the facts and circumstances as narrated in these applications are conjoint and linked with each other, therefore, a common order is passed herein below.


# 2. It is worth to note that most of these companies, (collectively referred to as “Corporate Debtors” and individually “Corporate Debtor”) were proceeded against by the SBI U/s 7 of the Insolvency & Bankruptcy Code, 2016 (I&B Code) and in the case of other few companies, operational creditors have filed insolvency petitions u/s 9 of the I&B Code.


# 3. Mr. Venugopal N. Dhoot, ex-director/promoter had filed an application (CA/1022(PB)/2018) before the Principal Bench, NCLT New Delhi praying that all the matters relating to the Corporate Debtors must be heard by one and the same court of Mumbai Bench of NCLT. Likewise, another application was filed by the State Bank of India before the Principal Bench seeking the same reliefs as were sought in the said Application i.e. consolidation of CIRPs of all the Corporate Debtors. The Hon’ble Principal Bench disposed of both the applications vide a common order dated 24.10.2018. In the said Order dated 24.10.2018, the Hon’ble Principal Bench has transferred all matters where CIRP commenced of the Corporate Debtors to this Bench as it will, inter alia, serve the basic purpose of tagging of all matters to avoid conflicting orders, if any, in the connected matters . In the same order, while dealing with the reliefs prayed for by State Bank of India in its application, the Principal Bench held as follows:-

  • This order shall dispose of CA No. 1022(PB)2018 and 1094(PB)/2018. The prayer made in the first application is to issue directions for hearing of all Videocon matters by the one and same Bench of Adjudicating Authority-NCLT, Mumbai. The applicant has made averments that Videocon Group of Companies have many group companies against whom the CIR process has been initiated………..

  • 5. We have heard the learned counsel for the parties, there appears to be consensus amongst the counsels for all the parties that all the petition be placed before one bench. Accordingly, we find that the lead case and majority of the matters are posted before Bench headed by the Hon’ble M.K. Sehrawat, Member (Judicial). Therefore, it will serve the basic purpose of avoiding conflicting order and facilitating the hearing if the matters are posted before the aforesaid bench. Accordingly, we direct that the matter be posted before the aforesaid bench. The Registry of NCLT, Mumbai is directed to take steps and place the matters before the aforesaid Bench.

  • 6. The other request that all the petitions be treated as part of one Corporate Insolvency Resolution process cannot be taken up by us and any such request however shall left open to be decided by the Adjudicating Authority-NCLT Mumbai”.


# 4. Following the directions of the Hon'ble Principal Bench, the cases of all Mumbai Benches were transferred by the registry to one Bench, now ceased of the matter, taking up the issue of consolidation collectively in this judgement. All the applications shall be dealt with on merits independently hereafter.


# 6. Hence, the SBI, pursuant to the order dated 24.10.2018 passed by the Hon’ble Principal Bench, NCLT, New Delhi, has filed this Application seeking the following reliefs:

  • “(a) Order and direct substantive consolidation of the Corporate Debtors into a single proceedings solely for the purposes of CIRP in accordance with the provisions of the Code, including but not limited to the acceptance, confirmation and all other actions with respect to the resolution plan for the Corporate Debtors and any and all amendments or modifications thereto, in such consolidated proceedings.

  • (b) Order and direct that solely for the purpose of the consolidated proceedings, all assets and liabilities of the Corporate Debtors are merged and are deemed to be the assets and liabilities of all the Corporate Debtors on a consolidates basis;

  • (c) Order and direct that solely for the purpose of the consolidated proceedings that all obligations and debts due or owing to or from any Corporate Debtor from or to any other Corporate Debtor are eliminated;

  • (d) Order and direct that solely for the purpose of the consolidated proceedings, any obligations of any Corporate Debtor an all guarantees thereof executed by one or more of the other Corporate Debtors are deemed to be one obligations of all the Corporate Debtors on a consolidated basis;

  • (e) That each and every claim filed in the individual proceedings of any of the Corporate Debtors is deemed filed against all the Corporate Debtors in the consolidated proceedings;

  • (f) That the appointment of a single common Resolution professional who will carry on the duties and perform the functions of a Resolution Professional in accordance with provisions of the Code for the consolidated proceeding;

  • (g) That a common COC may be constituted for all the Corporate Debtors so that the decision making process in relation to the CIRP may be done in an efficient manner and to diminish the scope of any conflicting decision;

  • (h) That September 25, 2018 shall be considered as the common insolvency commencement date for all the corporate debtors and therefore, the maximum period during which CIRP has to be completed in accordance with section 12 of the Code shall be computed from September, 25, 2018;

  • (i) That a comprehensive Resolution Plan dealing with all or a collection of the Corporate Debtors based on relevant factors including without limitation commonality of business may be formulated and approved by the COC and put up for approval before this Tribunal for its approval in accordance with the provisions of the Code.”


# 25. The Ld. Counsel for the SBI has suggested some of the ways in which substantive consolidation of CIRP of the Corporate Debtors may be achieved, given below;

  • a. By pooling together the assets of all the Corporate Debtors;

  • b. By appointing a common Resolution Professional for all the Corporate Debtors;

  • c. By constituting a common COC for all the Corporate Debtors; 

  • d. By commonizing the Insolvency commencement date for calculating the maximum period available for completing the CIRP. The Counsel suggests the 25th September 2018 as the date of CIRP commencement;


# 26. The Ld. Counsel for the SBI finally argues that lack of substantive consolidation may result in lesser value being derived for the Corporate Debtors which are expected to receive Resolution Plans, thereby traversing the object of the Code i.e. maximisation of the value of the assets of the Corporate Debtor. The potential benefit of the substantive consolidation during CIRP may far outweigh any potential harm to interested parties.


# 27. Another Application MA 1416/2018 is filed by the promoter of the Videocon group of companies Mr. Venugopal Dhoot seeking the similar relief of ‘Consolidation’ of CIRP i.e. commencement of Insolvency Process under Insolvency Code of all the group companies of Videocon which are undergoing insolvency.


# 43. The Ld. Counsel for the SBI has tendered certain English case laws on the issue of consolidation of CIRPs of the group companies. The list of the same is given herein below

  • a. Continental Vending Machine Corp. vs. Irving L. Wharton’ in United States Court of Appeals, Second Circuit decided on June 5, 1975 . 

  • b. Vecco Construction Industires ,INC and others; decided June 9,1980 

  • c. Auto-Train Corporation , Inc. Florida Corporation ; decided on Jan.30,1987 

  • d. Donut Queen Ltd. Debtor ; In re BAPAJO Ltd. Debtor order dated August 3, 1984 

  • e. Food Fair Inc. Debtor ; Unites States Bankruptcy Court , S.D. New York ( bankruptcy no. 78 B 1765); order dated March 18, 1981 

  • f. Donut Queen Ltd. Debtor ; In re BAPAJO Ltd. Debtor order dated August 3, 1984.

These case laws will be further dealt with in detail in the succeeding paragraphs.


# 80.  …………   On due reading of all these judgements, one proposition of law emerges that the motion of ‘consolidation’ depends upon the facts and circumstances of each debtor/debtors. It is appropriate and suitable to give a ruling at this occasion that there is no single yardstick or measurement on the basis of which a motion of consolidation can or cannot be approved. With humility, this Bench herein below sets-out a list of examples, based upon reading the history of ‘group insolvency’, so that the presence of them can lead to a decisive conclusion of triggering of ‘consolidation’ of Insolvency process. Undisputedly, and also laid down by the courts, before ordering consolidation, a preliminary searching inquiry be ensured that whether consolidation yields benefits to stakeholders by offsetting the harm if not consolidated. Areas of inquisition and our finding on the facts of this case are :-

i) Common Control : These companies are promoted by Dhoot Family.

ii) Common directors : The family members of V.N. Dhoot are directors in all the Videocon group companies.

iii) Common assets : There are many instances of interdependency between the group companies and the assets are common to such an extent that, for instance, one company has leased its land to another group company to carry on manufacturing.

iv) Common liabilities : The clauses of the VTL and RTL Agreements have demonstrated that "all guarantees thereof executed by one or more of the other Corporate Debtors are deemed to be one obligations of all the Corporate Debtors. “The company along with 12 other affiliates/entities (collectively referred to as “Obligors” and individually referred to as “Borrower”) executed facility agreement with consortium of existing domestic rupee term lenders, in the obligor/co-obligor structure, wherein all the Rupee Term Loans of the obligors are pooled together....” .

v) Inter-dependence : Some corporate debtors are engaged in manufacturing, assembling and distribution of comprehensive range of consumer electronic and home appliances. Also manufacturing set top boxes, Colour Televisions, DVD Players Etc. by some Units/subsidiaries in Aurangabad. This is stated to be India’s Largest Electronics Retail chain. The uniqueness stated to be that all are marketed under single license of “Videocon Trademark”.

vi) Inter-lacing of finance : Pursuant to the RTL Agreement, a consortium of banks and financial institutions including SBI had agreed to grant ‘Rupee Terms Loans’ to the RTL obligors under an obligor/co-obligor structure. The Rupee Term Loans under the RTL Agreement were to be utilised for the purposes of refinancing of existing rupee debt of the RTL obligors, funding the capital expenditure in relation to the ‘Ravva Field’ and the capital expenditure in relation to the consumer electronics and home appliances

business of the RTL obligors and such other end users as permitted by the facility agent under the RTL Agreement. Recital C of the RTL Agreement states that:

“ The Rupee Term loan has been sanctioned by the lenders for the purposes of refinancing of existing Rupee debt of the obligors, funding the capital expenditure in relation to the consumer electronics and home appliances business of the obligors and such other end uses permitted by the Facility Agent”. (Emphasis Supplied).

vii) Pooling of resources : Facts and evidences have demonstrated that there was common pooling of human resources, liaising and funding. Undisputedly, the directors are common using their contacts and relationship to run all the subsidiaries for which common office staff, accountants, and other human resources are mobilised to manage the affairs collectively. Further, common arrangement of capital/funds is an accepted position in Videocon group.

viii) Co-existence for survival : An interlinked chain of business operations is also evident in this group case. Electronic gadgets/home appliances are manufactured by a unit. However, distribution and market chain is controlled by another entity. Interdependence upon each other is a unique feature visible in Videocon group.

ix) Intricate link of subsidiaries : Consolidated accounts, pooling of resources, commingling of assets and business functions are the examples of intricate link among subsidiaries.

x) Inter-twined accounts : The consolidated accounts of 15 months is one of the evidence to demonstrate that on demand by the lenders, all the subsidiaries have prepared a common position of their assets and liabilities, thereafter, prepared consolidated accounts, stated to be duly approved by an auditor.

xi) Inter-looping of debts : On perusal of the agreements, it is evidenced that the clauses have made a provision of securing the debts owed by subsidiaries of Videocon group. For example, Clause 2.4 of the RTL Agreement states about the Utilisation of the proceeds i.e. :

  • "(i) the obligors hereby agree that the proceeds of the Rupee Term Loan shall be utilized for the following purposes:

  • (a) Capital expenditure in relation to the Ravva Field and the capital expenditure in relation to the consumer electronics and home appliances business of the obligors, for an amount not exceeding Rs.684 Crores incurred or to be incurred by the Obligors between the current year 2012 and till 2014;

  • (b) Refinancing of existing Rupee Loans listed in part A of schedule 9 for an amount not exceeding Rs.19,511 Crores; and

  • (c) Such other end use as may be permitted by the lenders in writing. "

xii) Singleness of economics of units : The group is known by its brand name "Videocon". Therefore, the entire economics of the group revolve around this brand name either for the purposes of procuring raw material or finally selling the appliances manufactured. The group as a whole is therefore, has a common economic feature to sustain and promote the business operations.

xiii) Common Financial Creditors : As per two Agreements viz. RTL & VTL the lenders are members of ‘consortium of banks’ which is common for all. Because the impugned Insolvency Petitions were filed by SBI for itself and also on behalf of the said Joint Lenders Forum, already listed above, the names of all the banks forming consortium thus substantiate the fact that the financial creditors are common for the 15 debtor entities.

xiv) Common group of Corporate Debtors : As per the said two agreements the Debtors are combined together for the purpose of availing various loan facility. Therefore, this is a case where all the Debtors are independently as well as jointly liable for the repayment of loans facilities availed.


# 82. Decisively, the above discussion has deciphered cases of this group into two categories. Rather it is absolutely necessary to place my view with humility that if at all a question of ‘ Group Insolvency’ is to be answered in such type of group of cases, then in that situation, a blanket view is not possible to declare that the entire Group is fit to be CONSOLIDATED simply being connected or controlled by common management. Although, these two factors are necessary for determination of ‘consolidation’, but not the only basis. Over and above, each unit or subsidiary is to be examined on its merits, that whether all the parameters are being satisfied or not. These parameters in fact are the ‘factors’ to distinguish the units in two categories, precisely as under :-

  • a. A category/ classification of those cases can be made where the business operations are so dove-tailed that their management, deployment of staff, production of goods, distribution system, arrangement of funds, loan facilities etc. are so intricately interlinked that segregation may result in an unviable solution. Over and above, most important is that if segregated, the possibility of restructuring or the option of maximisation of value of assets become so bleak which shall overweigh the consolidation.

  • b. The other category/ classification can be of such group cases where the accounts are interlinked and due to the existence of debt agreement, the liabilities have become common but assets are identifiable. Hence, on segregation the independent structure of each unit shall survive which shall also result into viable profitable restructuring proposals. Therefore, in this category of cases, although for the limited purpose of signing of certain documents through which loan facilities might have been commonly availed but that can be segregated so that the assets and liabilities are identifiable separately thus facilitating a good investor.


# 85. The consequence of the above decision is that out of the 15 entities, CIRPs of 13 entities namely:

1. Videocon Industries Limited

2. Videocon Telecommunications Limited

3. Evans Fraser & Co. (India) Ltd.

4. Millennium Appliances (India) Ltd.

5. Applicomp India Ltd.

6. Electroworld Digital Solutions Ltd.

7. Techno Kart India Ltd.

8. Century appliances Ltd.

9. Techno Electronics Ltd.

10. Value Industries Ltd.

11. PE Electronics Ltd.

12. CE India Ltd.

13. Sky Appliances Ltd.

are directed to be ‘Consolidated’.



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Disclaimer:

The sole purpose of this post is to create awareness on the "IBC - Case Law" and to provide synopsis of the concerned case law, must not be used as a guide for taking or recommending any action or decision. A reader must refer to the full citation of the order & do one's own research and seek professional advice if he intends to take any action or decision in the matters covered in this post.