Entity Versus Enterprise: Dealing with Insolvency of Corporate Groups
21 Pages Posted: 18 Mar 2019
Date Written: March 12, 2019
Business is being increasingly viewed on an enterprise basis; accounting standards and securities regulators view the business on a “group” basis. However, corporate laws remain anchored to separation of legal entity; this is largely the case of insolvency laws too. However, given the primary object of insolvency laws to rescue an entity, an entity-focused approach mostly may fail to do justice to the needs of an ailing enterprise, where resources, operations and assets may be scattered across entities. In liquidation too, where the intent is to liquidate assets, if the assets are entangled across entities and jurisdictions, no meaningful liquidation may be achieved.
While the approaches to achieving group-focused insolvency resolution or liquidation may be many, there are essentially two major ones – procedural consolidation, and substantive consolidation.
Procedural consolidation is where the proceedings of insolvency of different entities are coordinated, even if before different judicial or adjudicating authorities. This has successfully been done in several major insolvencies involving cross-border entities, such as BCCI, Maxwell, Lehman and Madoff.
Substantive consolidation disregards the separation of entities and pools the assets and liabilities of various entities into a common hotchpot. This extreme remedy is rarely used, even though UNCITRAL has been aggressively working on developing the principles for the same. Basically, substantive consolidation is ordered by courts where pooling of assets and liabilities is to larger benefit of different creditors, and generally not prejudicial to any. Mostly, this is done under circumstances similar to those inviting “lifting or piercing the corporate veil”, even substantive consolidation is different from veil lifting or piercing.
Judicial comfort to substantively consolidate entities has been oscillating over time, though the ruling in Owens Corning seems to be a significant milestone.
In India, even though there are no precedents to substantive consolidation under winding up proceedings, there have been several rulings of courts where lifting/piercing of veil has been done. This is mostly done in cases where there is abuse of corporate personality. Thus, explicit provisions in sec. 36 (4) (d) of the Code, whereby the assets of an Indian or foreign subsidiary are not to be treated as a part of liquidation estate, may not been as doing damage to the essential principle of disregarding corporate personality, where the personality itself is not real.
Keywords: insolvency, groups, entity, enterprise, bankruptcy, resolution, rescue
Suggested Citation: Suggested Citation