TMI Blog2019 (8) TMI 1654X X X X Extracts X X X X X X X X Extracts X X X X ..... ue to default in repayment of debt , at that juncture a right recourse is required to be adopted. That is why, in my humble opinion, the right recourse shall be to examine the necessity of Consolidation . The UK / USA courts have dealt with the process of consolidation along with the jurisdiction of the Authority by pronouncing that equity and fairness ought to be a yardstick by lifting the corporate veil. Consolidation is to be utilized as a mechanism to maximise the value of financially stressed group of companies. Economic benefit ought to be the purpose and for that a preliminary searching enquiry is suggested which would yield benefit to stakeholders by off-setting any harm, if inflicted, if not consolidated. 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 ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. A bird eyed view of the applications under consideration is as under: a. MA 1306/2018 in CP No.02/2018, CP No. 01/2018, CP No. 543/2018, CP No. 507/2018, CP No. 509/2018, CP No. 511/2018, CP No. 508/2018, CP No. 512/2018, CP No. 510/2018, CP No. 528/2018, CP No. 563/2018, CP No. 560/2018, CP No. 562/2018, CP No. 559/2018, CP No. 564/2018 (a common application applicable to all main petitions of various Corporate Debtors). This application is filed by SBI seeking consolidation of Corporate Insolvency Resolution Processes for 15 Corporate Debtor (Videocon group companies). b. MA 1416/2018 in CP No. 02/2018 filed by Venugopal Dhoot (ex-director of the group) seeking consolidation. c. MA 115/2019 MA 393/2018 in CP No. 543 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. VIL Admitted II 06.06.2018 Anuj Jain 7. Trend Electronics Admitted II 25.09.2018 Dushyant Dawe 8. Applicomp Admitted II 25.09.2018 Avil Menezes 9. Techno Kart Admitted II 25.09.2018 Divyesh Desai 10. Century Appliances Admitted II 25.09.2018 Dushyant Dave 11. KAIL Admitted III 08.06.2018 Mahender Khandelwal 12. Millennium Appliances Admitted III 31.08.2018 Avil Menezes 13. SKY Appliances Admitted III 31.08.2018 Mahender ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Techno Electronics Limited - (IB) No. 512 of 2018 (Bench No. III, NCLT, Mumbai) 6) Evans Fraser and Co. (India) Limited - (IB) No. 508 of 2018 (Bench No. I, NCLT, Mumbai] 7) Electroworld Digital Solutions Limited - (IB) No. 511 of 2018 (Bench No. I, NCLT, Mumbai) 8) Value Industries Limited (IB) No. 560 of 2018 (Bench No. I, NCLT, Mumbai) 9) Applicomp (India) Limited - (IB) No. 507 of TO18 (Bench No. II, NCLT, Mumbai) 10) Trend Electronics Limited - (IB) No. 559 of 2018 (Bench No. II, NC LT, Mumbai) 11) Techno Kart India Limited - (IB) No. 510 of 2018 (Bench No. II, NC LT, Mumbai) 12) Century Appliances Limited - (IB) No. 562 of 2018 (Bench No. II, NCLT, Mumbai) 13) Kail Ltd. - (IB] No. 543 of 2018 (Bench No. III, NCLT, Mumbai) Furthermore, the petitioning creditor has also filed a Petition under Section 7 in this Hon b1e Tribunal against 14th Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with on merits independently hereafter. B) M.A. 1306/2018 5. This Application No. 1306/2018 is filed on 30.10.2018 by State Bank of India (SBI) to seek an order for the Consolidation of the Corporate Insolvency Resolution Process ( CIRP ) of (1) Videocon Industries Ltd. (VIL), (2) Videocon Telecommunications Limited (VTL), (3) KAIL Ltd. (KAIL), (4) Evans Fraser Co. (India) Ltd. (Evans Fraser), (5) Millennium Appliances (India) Ltd. (Millennium Appliances), (6) Applicomp India Ltd. (Applicomp), (7) Electroworld Digital Solutions Ltd. (Electroworld), (8) Techno Kart India Ltd. (Techno Kart), (9) Trend Electronics Ltd. (Trend Electronics), (10) Century Appliances Ltd. (Century Appliances), (11) Techno Electronics Ltd. (Techno Electronics), (12) Value Industries Ltd. (Value Industries), (13) PE Electronics Ltd. (PE Electronics), (14) CE India Ltd. (CE India), and (15) Sky Appliances Ltd. (Sky Appliances). Each of these Companies were promoted by Dhoot Family and thus form part of the Videocon group of companies. (5A) The list of creditors of these companies is given below: i. Dena Bank ii. State Bank of India iii. Allahabad Bank iv. IDBI Bank v. Indian O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 7. Background of the Corporate Debtors The Videocon Group Companies are engaged in different types of businesses, for instance, a. VIL is engaged in manufacturing, assembling and distribution of comprehensive range of consumer electronic and home appliances. VIL is the licensee of Videocon Trademark b. VTL is provided telecom services in six circles across India. It is engaged in the business of Telecommunication and is the subsidiary of Electroworld. c. Value Industries is manufacturing consumer electronic and home appliances. d. Trend Electronics is manufacturing set-top boxe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r end users as permitted by the facility agreement under the RTL agreement. 9. One of the constituent of the RTL is CE India. CE India, pursuant to indenture of mortgage dated March 20, 2013, created charge by way of mortgage over, inter alia, the Videocon brand, goodwill, trademarks and patents to secure the Rupee Term Loan facility granted to the RTL obligors pursuant to the RTL Agreement. 10. Another constituent of the agreement was Videocon Telecommunications Ltd. (VTL), which had availed of Rupee Term Loan facility from certain lenders including SBI pursuant to the terms and conditions of Rupee Facility Agreement dated May 31, 2010, as amended by the Agreement of Modification to the Rupee Facility Agreement dated August, 30, 2010 (collectively the VTL Agreement ). 11. Some of the Corporate Debtors have also availed working capital facilities, most of which have been guaranteed by VIL. 12. Due to 'defaults' in the accounts of the Corporate Debtor, a Joint Lenders Forum (JLF) of the lenders of the RTL obligors and the lenders of VTL was constituted in accordance with RBI guidelines. Pursuant to the decision taken as part of the collective-action-plan by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Corporate Debtors was being carried on, is a co-obligor for the loans under the RTL agreement by virtue of the indenture of mortgage dated March 20, 2013 (discussed supra). 19. It is further submitted that the RTL obligors prepared consolidated financial statements for the fifteen months period ended March, 31, 2017 so as to present the consolidated position of assets and liabilities of the RTL obligors with a view to present the RTL obligors as a single-economic-unit. These financial statements elaborately discussed the impact of VTL s liabilities over the assets and financial conditions of the RTL obligors, thereby clearly bringing out the absolute 'interdependence' of the Corporate Debtors on each other. 20. It is also submitted that the shareholding pattern of the Corporate Debtors, as available on the website of MCA, clearly shows the unity of interest and ownership between the Corporate Debtors. The assets and business functions of the Corporate Debtor are 'intricately intertwined'. The shareholding Pattern is co-mingled due to cross holdings by the group companies. Therefore, to demonstrate the cross shareholding pattern of the Corporate Debtors, chart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rporate Debtors. 23. The Ld. Senior Counsel for SBI submits that the assets and liabilities of the Corporate Debtors are completely knotted into each other that if separated, shall be prohibitive and prejudiced to the interest of all creditors. It is submitted that if Corporate Debtors are allowed to be resolved independently of each other pursuant to the provisions of the Code, then such resolution may not yield maximum value for the respective Corporate Debtors and that result shall be detrimental to the interest of the secured creditor and other stake holders of the Corporate Debtors. 24. Importantly, it is further submitted that in the US Bankruptcy Laws there have been instances wherein substantive consolidation have been supported. There are precedents where Bankruptcy Courts have consolidated proceedings along with assets and liabilities of different debtor companies by exercising their equity jurisdiction. The presence of one or more of the following criteria are considered for substantive consolidation : a. The degree of difficulty in segregating and ascertaining individual assets and liabilities; b. presence or absence of consolidated financial statements; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rein each company is jointly and severally liable to repay the entire amounts. (c) The committees of creditors are more or less common. (d) The lenders have been treating these companies as a single economic unit, even from the time of granting the loans. (e) The Videocon Group companies themselves have been filing common and consolidated financial statements. (f) There is extensive cross-shareholding. (g) Multiple expressions of interest were floated in each company, however, no interest is shown by any resolution applicant so far in any of the companies. (h) If there is no resolution, the 15 Videocon Group companies will go into automatic liquidation, which is against the objectives of the IBC, namely maximization of value and resolution. Reliance was placed on the judgement of the Hon ble NCLAT in Binani Industries Limited v. Bank of Baroda Anr. Company Appeal (AT) (Insolvency) No. 82 of 2018, and Hon ble Supreme Court in Swiss Ribbons Pvt. Ltd. Anr. v. Union of India Ors. (2019 SCC Online SC 73). (i) There is precedent of group Insolvency and consolidation under UNCITRAL model law, USA, Germany and European Union. C) MA No. 1416/2018 27. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; failing to provide to the applicant certain important documents in relation to KAIL. 31. The result of the aforesaid action of the R.P. in this Application, Infotel has raised following prayers: A. To declare that the Applicant has a 40.21% share/voting right in the meetings / proceedings of CoC of KAIL Ltd. B. To order and direct that the purported co-obligor obligations are not enforceable in law. C. To set aside the decision of RP to classify the financial institutions listed under the purported co-obligor structure as qualifying for a voting share in CoC of KAIL Ltd. 32. The Ld. Counsel for Infotel submits that vide email dated 12th July 2018, the RP circulated a presentation for the first COC meeting categorising claims received by him under two heads. (i) Claims admitted under the 'primary lending' availed by KAIL where lenders lent money to KAIL--- the claims admitted under this head amounted to an aggregate of INR 1,119.39 Crores, of which the Infotel's percentage of share was 40.21% and; (ii) Claims admitted under a co-obligor structure , where although the money was not lent to KAIL but to certain other group companies, KAIL as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t when, as a matter of fact, they have not been disbursed any debt/money from such lenders. For example, the Central Bank of India has not lent any money to KAIL and yet its claim of INR 3068 Crores has been accepted by the RP of KAIL as a financial debt under the co-obligor structure and thus given a voting share of 14.5% in the COC. It is further stated that the justification given by the RP is that each co-obligor is also a primary borrower under the RTL Agreement having a clause of joint as well as independent liability. 36.1 Arguments made against consolidation by Senior Counsel Mr. Pradeep Sancheti Mr. Sancheti argued that substantive consolidation as proposed by the applicant is not envisaged in the IBC or the regulations made thereunder, and hence, the reliefs sought by the applicant does not stand. He added that even in the Report of the Insolvency Law Committee, which was published in March, 2018, though there were discussions on the need for provisions pertaining to group insolvency, however, it was suggested by the committee that it may be too soon for the introduction of the group insolvency regime in India. He added that substantive consolidation of CIRPs of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is also worth to place on record the legal meaning of contract of guarantee provided by section 126 of the Indian Contract Act, 1872 and it reads as A contract to perform the promise, or discharge the liability, of a third person in case of his default is contract of guarantee. 7.9 In light of the above definitions/meaning it is noticed that, since the debtor/co-obligor is a co-obligor to the VIL he is bound to fulfil an obligation of the VIL. Further, VIL is not a third party to the debtor/co-obligor thus jointly be called as Guarantor to the principal debtor/co-obligor. 40. In support of the demand of consolidation, cited the Hon ble Supreme Court's decision wherein quoted the importance of the admission of insolvency in the matter of Innoventive Industries Ltd. v. ICICI Bank Ltd., 920180 1 SCC 407, it was held that: 27. The scheme of the Code is to ensure that when a default takes place, in the sense that a debt becomes due and is not paid, the insolvency resolution process begins. Default is defined in Section 3(12) in very wide terms as meaning non-payment of a debt once it becomes due and payable, which includes non-payment of even part thereof or an i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the financial creditor, is important. This it must do within 14 days of the receipt of the application. It is at the stage of Section 7(5), where the adjudicating authority is to be satisfied that a default has occurred, that the corporate debtor is entitled to point out that a default has not occurred in the sense that the debt , which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority. Under sub-section (7), the adjudicating authority shall then communicate the order passed to the financial creditor and corporate debtor within 7 days of admission or rejection of such application, as the case may be. 29. The scheme of Section 7 stands in contrast with the scheme under Section 8 where an operational creditor is, on the occurrence of a default, to first deliver a demand notice of the unpaid debt to the operational debtor in the manner provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cern under the directions of a committee of creditors appointed under Section 21 of the Act. Decisions by this committee are to be taken by a vote of not less than 75% of the voting share of the financial creditors. Under Section 28, a resolution professional, who is none other than an interim resolution professional who is appointed to carry out the resolution process, is then given wide powers to raise finances, create security interests, etc. subject to prior approval of the committee of creditors. 33. Under Section 30, any person who is interested in putting the corporate body back on its feet may submit a resolution plan to the resolution professional, which is prepared on the basis of an information memorandum. This plan must provide for payment of insolvency resolution process costs, management of the affairs of the corporate debtor after approval of the plan, and implementation and supervision of the plan. It is only when such plan is approved by a vote of not less than 75% of the voting share of the financial creditors and the adjudicating authority is satisfied that the plan, as approved, meets the statutory requirements mentioned in Section 30, that it ultimately ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roof is highly technical in some facets of its application, but ultimately it is based on what the court regards as justice between all the creditors It is therefore convenient to set out some very elementary rules as to suretyship, shorn of complications arising from the provision of security or from the Ellis v Emmanuel distinction. In what follows C is the principal creditor, D the principal debtor, and S the surety (and all are companies). (1) So long as any money remains due under the guaranteed loan, C can proceed against either D of (after any requisite notice) S. (2) If D and S are both wound up, C can prove in both liquidations and hope to receive a dividend in both, subject to not recovering in all more than 100p in the . (3) S s liquidator can prove in D s liquidation (under an express or implied right of indemnity) only if S has paid C in full (so that C drops out of the matter and S stands in its place). (4) As a corollary of (3) above, S s liquidator cannot prove in D s liquidation in any way that is in competition with C; though S has a contingent claim against D (in the event of C being paid off by S) S may not make that claim if it has no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . VIL shall be liable for all the obligations and liabilities of the other obligor/co-obligor as an obligor and as an Obligor s agent. The liability of the Obligors to the secured parties shall not be discharged until and unless the Obligors have paid or discharged the outstandings owed to the Facility Agent, the lenders or the onshore security trustee and the offshore security trustee under the financing documents to the satisfaction of the lenders. For the avoidance of doubt, notwithstanding that the obligors may have paid all amounts due to any lender under the financial documents, the obligors shall remain liable to such lender, if as a result of any sharing arrangement between the lenders that has been notified to the Obligors under the Financing Documents, such lender is obliged to share the payments made by the Obligors with the other lenders, and consequently, the obligations owing to such Lender under the Financing documents are still owing and/or un-discharged . (Emphasis Supplied) Clause 2.4 of the RTL agreement: Utilisation of the proceeds (i) the obligors hereby agree that the proceeds of the Rupee Term Loan shall be utilized for the following purposes: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the SBI submits that the contention of the Infotel that the Obligor/Co-obligor structure of the RTL and VTL agreements is not enforceable in law, should be out rightly rejected. 49. The next rebuttal for Ld. Counsel for SBI is that the inter-linkage and interdependence of the Corporate Debtors is to such an extent that the creditors of the Corporate Debtor have dealt with the Corporate Debtors as if the Corporate Debtors are a single economic unit . The Corporate Debtors used to prepare consolidated financial statements which clearly show that the lenders and other stake holders of RTL obligors with the RTL obligors were declared as single economic unit. Paragraph 2 of auditor s Report on Agreed upon procedures assignment related to consolidated Statements of Assets and Liabilities and the Statement of Profit Loss of the specified companies of the Videocon Group dated 15.09.2017 provides as follows: 2. Our engagement was undertaken in accordance with the Standard on related services (SRS) 4400. Engagements to Perform agreed upon procedures regarding Financial Information , issued by the Institute of Chartered Accountants of India. These Consolidated Financial State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liable on a joint and several basis for all the obligations and liabilities of all other obligors/co-obligors. We note that such liability of each obligor for the borrowings of other co-obligors is not linked to any default and that such liability is absolute and primary from the date of execution of the Rupee Term Loan Agreement and independent of any default in payment by such co-obligors. (7) In the present instance, the obligation of KAIL to discharge the debt on behalf of the co-obligors who have borrowed the money from the lenders is joint and co-terminus with the borrower/co-obligors. Such an arrangement is therefore not within the nature of guarantee as it is not linked to default by the borrower/co-obligor . (Emphasis Supplied). 51. Therefore, the obligors (including KAIL) have joint and several liability under the agreements and such obligation is in the nature of joint promisor under section 43 of the Indian Contract Act, 1872 and for argument sake may not be in the nature of guarantee under section 126 of the said act. In the matter of B. R. Nagendra Iyer Ors. V. R.V. Subburamchari Anr. [AIR 1935 Mad 1055], it was held that: The question is, d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the debt against the consideration for the time value of money in favour of the Principal Borrower (JENV). 54. Further reliance has been placed on the judgement of NCLAT in Company Appeal (AT)(Insolvency) No.169 of 2017 in the matter of Edelweiss Asset Reconstruction Company Limited Vs Synergies Dooray Automative Limited Others, Order dated 14.12.2018, wherein it was held that: 66. On perusal of above three assignments agreements, it is clear those documents are duly executed with the concerned authorities and they are not questioned by any party to those proceedings. Appellant herein, being similarly situated like thereof Synergies Castings Limited and Millennium Finance Limited , do not have locus standi to question the veracity of those documents on mere apprehension or allegation of malafides or fraudulent etc. Admittedly, the appellant is not a party to those agreements. It is tenable to raise apprehensions before the Adjudicating Authority to adjudicate. The Courts usually adjudicate issue basing on cause of action arisen in a particular case. The Adjudicating Authority cannot enter into roving enquiry on mere apprehension, baseless allegations. 67. ..... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incipals. The Judge stated that the practice of his court had been to restrain a judgment-creditor from recovering from a surety until he had exhausted his remedy against the principal but in his view the surety should be liable to imprisonment while the principal was at large. Couch, C.J., and Melvill, J. agreed with this opinion and observed- This court is of opinion that a creditor is not bound to exhaust his remedy against the principal debtor before suing the surety and that when a decree is obtained against a surety, it may be enforced in the same manner as a decree for any other debt. In the same order the NCLAT while giving its own observations held: 32. There is no bar in the I B Code for filing simultaneously two applications under Section 7 against the Principal Borrower as well as the Corporate Guarantor(s) or against both the Guarantors . However, once for same set of claim application under Section 7 filed by the Financial Creditor is admitted against one of the Corporate Debtor ( Principal Borrower or Corporate Guarantor(s) ), second application by the same Financial Creditor for same set of claim and default cannot be admitted against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interest of the labours, workers, members etc. of Trend Electronics shall be adversely affected if the consolidation applications are allowed. 59. It is stated that the Applicant union has around 700 members who are working in Trend electronics. Trend Electronics is public limited company listed on the stock exchange. By order dated 25.09.2018 in CP No. 559 of 2018 passed by this Bench, Trend Electronics was referred for Corporate Insolvency Resolution Process under the provisions of I B Code. Mr. Dushyant Dave was appointed as IRP who was later on approved as RP by the CoC of Trend Electronics. 60. It is stated that out of the 15 group companies, only three i.e. i) Videocon Industries Ltd., ii) Value Industries Ltd., and iii) Trend Electronics Ltd., are listed companies. M/s Trend Electronics is a going concern and is in the business of manufacturing and selling the dish antenna and set top box which are made mandatory pursuant to the compulsory digitalisation by Ministry of Information and Broadcasting. 61. It is stated that Trend Electronics is an independent legal entity and is not dependent on the businesses of other group companies. The employees of Trend Electr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appliances. The applicant seeks intervention in applications relating to consolidation of CIRPs of 15 Videocon group companies. 66. M/s KAIL Ltd. is in the business of manufacturing and selling TV, LCD, LED TV and Marketing of Kitchen Appliances. It is submitted that the annual turnover of KAIL Ltd. is more than ₹400 Crores and it is only due to the financial crunches faced by the Group Company, M/s KAIL Ltd. has been dragged in Insolvency and Bankruptcy Code proceedings. Otherwise, M/s KAIL Ltd. is able to do business and is independently capable to be maintained itself as a going concern. 67. It is stated that if a common resolution plan is called for all the 15 Videocon group companies, M/s KAIL Ltd. which have a good asset value will be treated at par with the other companies which have lesser asset value. M/s KAIL Ltd. is a separate independent entity and the employees of all the 15 Videocon group companies cannot be treated as belonging to one Company. Hence, by this application the Applicant seeks that CIRP of M/s KAIL Ltd. should not be consolidated with the CIRPs of other group companies. I) MA No. 1574/2019 68. This application has been filed on 24.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if shown to be discriminatory against one or other Financial Creditor or the Operational Creditor , such plan can be held to be against the provisions of the I B Code . 73. The Ld. Counsel has cited the judgement of Hon ble Supreme Court in the matter of 63 Moons Technologies Ltd. (formerly known as Financial Technologies India Ltd. (FTIL) Ors. V. Union of India Ors. [Civil Appeal No. 4476 of 2019], Order dated 30.04.2019 to assert the proposition that Section 396 of the Companies Act, 2013 i.e. Power of Central Government to provide for amalgamation of companies in public interest should not be misconstrued to lead to arbitrary and unreasonable results. The judgement says that if the Central Government has exercised its power under section 396 of the Companies Act, 2013, the compromise or arrangement are not outside the scope of judicial review. And the same is applicable in insolvency context also, pleaded by the Counsel. In this case, Hon ble Bombay High Court had approved the Central Government s order of merger of a debt ridden 100% subsidiary of a listed entity into the holding company. The Hon ble Supreme Court had set aside the Hon ble High Court s order in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mited has no interdependency with the business of the other group companies, and hence, consolidation was not necessary, and that the same was being floated only to secure the interests of the banks. 74. It is further contended that consolidation will neither benefit the creditors nor the group companies because the financial affairs of all the group companies are completely separate, hence can be handled by separate CIRP proceedings. J) Findings:- 75. A philosophical opening remark, before addressing this interesting issue as emerged out of the discussion made herein above, is that if in life an attempt is made to avoid a crucial situation either by ignoring or deferring it, this is experienced that, that very situation or problem resurface so fast so that it compels to deal urgently leaving no scope for avoidance or any more deferment. Thus leaves no alternative but to tackle the bull by the horns . Reason for making this observation at the very start of the Findings arose because of an observation made in the Report of The Insolvency Law Committee dated 26th March 2018 on Page 83 a part of Annexure II- [Summary Response to Comments] at Sr. No. 17 given as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enshrined in the Insolvency Code. 77. A preliminary question arises that under what circumstances an order of Consolidation can be demanded or suo-moto be passed by a court / tribunal. Answer is that when the promoters/ directors of a company diversify the business in various field by creating several independent entities , call it subsidiaries, having cross share-holding with the constitution of common directors and at some point of time the Group gets financially stressed due to default in repayment of debt , at that juncture a right recourse is required to be adopted. That is why, in my humble opinion, the right recourse shall be to examine the necessity of Consolidation . 78. Before arriving at any conclusion on Consolidation , the existence of certain ingredients are necessary to be examined, viz ; (1) Common control, (2) Common directors, (3) Common assets, (4) Common liabilities, (5) Inter-dependence, (6) Inter-lacing of finance, (7) Pooling of resources, (8) Co-existence for survival , (9) intricate link of subsidiaries 10) inter-twined of accounts, 11) inter-looping of debts, 12) singleness of economics of units, 13) cross shareholding, 14) Inter dependence due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cured creditors, both by parent and subsidiary corporations. Apco was principally the sales arm for the Continental which was manufacturer of vending machines. Talcott had financed each entities and in lieu mortgage of machines and other devices were kept as security, covering their respective indebtedness. It is worth to draw attention that although the security agreement with the said two entities had not contained cross collateralization agreement i.e. no provision allowing Talcott to set off the obligation of one corporation against the collateral which it held to secure the debts of the related corporation entities, nor there was any guarantee by either Apco or by Continental of each other s indebtedness. A major point was under consideration, that due to improvement of some creditors position was in a way inherent in a consolidation, it would be unfair and inequitable to permit such unsecured creditors to improve their position, but to deny the secured creditors such improvement. The second major point for adjudication was that the security agreements had given Talcott (secured creditor) a lien for any and all obligations no matter how and when arising and whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roved. And finally following the precedent of Cl. Chemical Bank NewYork Trust Company V. Kheel 369F.2d. 845 ( 2 Cir.1966) ; approved the motion of consolidation . b) In the case of Vecco Construction Industries, INC and others; decided June 9,1980 ( Bankruptcy No. 79-224-A United States Bankruptcy Court E.D. Virginia): The debtor Vecco Construction Industries (Vecco) had filed a petition for relief against the four subsidiaries seeking consolidation of their respective petitions with that of Vecco. The four subsidiary corporations were wholly owned by Vecco. Facts have stated that Vecco held the stock in its own name, dealing in construction business. The entities were having consolidated financial reports and the individual statements as well as operation of accounts were also consolidated into one account. As per the facts, Vecco had acquired all the assets of its subsidiaries as well as assumed the liabilities. The entities i.e. Vecco and subsidiaries were having identical directors and also utilising the same office space. They were also having common administrative employees. There was a common consolidated account through which all receipts and disbursements were ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure nothing but for protecting substantive rights and if there is a possibility of unfair treatment, the demand of consolidation could be questioned. In determining whether it was proper to allow consolidation of proceedings, a yardstick is to measure the protection of substantive rights of the stakeholders. Consolidation is sometimes also felt necessary because of difficulty in segregating the inter-twined business accounts or operations. Consolidation was stated to be approved because of difficulty in ascertaining individual assets and liabilities as well as because of presence of consolidated financial statements or consolidated profitability or interdependence on ownership between the various corporate entities, existence of inter-corporate guarantees on loans. The extent to which assets of the corporate entities are found to be hopelessly commingled must necessarily be decided on a case-by-case basis. The continued profitability of corporate entities operating on a consolidated basis was seen as an important consideration in allowing consolidation. An another aspect advocating the consolidation was that where there existed a unity of interests, common ownership, could be a goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so been quoted that to claim their Pound of flesh a rule is to follow equality in distribution. A Court is to pass an order of consolidation when it is satisfied that consolidation would yield benefit greater than inflicting any harm. However, in that case, the Court was of the view that the consolidation has not granted benefit therefore, held that the lower court had erred in consolidating Railway Services Corporation Entity into Auto Train Corporation s Estate. d) In the case of Food Fair Inc. Debtor ; United States Bankruptcy Court , S.D. New York ( bankruptcy no. 78 B 1765); order dated March 18, 1981, facts, in short were that certain entities (stated to be 17) (the debtors), each one of them filed a petition for an arrangement. The Court had authorised procedural consolidation and joint administration . The issue before the Hon ble Court was that should it be substantatively consolidated so that a single plan of arrangement of assets and liabilities be carried out. The debtors have filed a notice of motion which was duly served upon all the creditors who have filed their claims to the representatives of the consolidated creditors committee. According to an observati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs are eliminated and are deemed to be of no force and effect: and any claim or portion thereof filed or to be filed by any creditor based upon such a guarantee is void and of no force and effect; (c) Any obligation of any debtor and all guarantees thereof executed by one or more of the other debtors are deemed to be one obligation of the Consolidated Debtors; (d) Any claims filed or to be filed in connection with any such obligation and such guarantees are deemed to be one claim against the Consolidated Debtors; (e) Each and every claim filed in the individual proceedings of any of the debtors is deemed filed against the Consolidated Debtors in the Consolidated proceedings; (f) The debtors filing of the Plan is ratified and approved, and the Consolidated debtors are authorised to take all lawful action in connection with the plan and any and all amendments or modifications thereto; (g) In the event of a termination of the Consolidated proceedings for any reason other than by reason of the confirmation of a plan in the Consolidated Proceedings, subject to further order of this court, this order of substantive consolidation shall, without further order of this court, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as two separate entities and that the financial affairs have indicated the fact of separate financial data. It had also been contended that consolidation would not be equitable to all creditors. According to an observation in the judgement, quote Recent cases have succinctly stated the proposition that a determination of whether or not consolidation is necessary hinges on a balancing of the equities favouring consolidation against the equities favouring continued debtor separateness unquote. Further, quote As can thus be expected, the parties seeking consolidation bears the burden of proof to demonstrate that any prejudice resulting from consolidation is outweighed by the greater prejudice posed by the continued separation of the estates .. A necessary corollary of this proposition is that it is incumbent upon the party seeking consolidation to demonstrate that it would be prejudiced if the estates were to remain as separate. In this line of thought, many factors have been considered in determining a motion for consolidation. Discussing the facts, it was noticed that Donut Queen and Bapajo does not maintain consolidated financial accounts. An accountant had testified that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obilised 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... takeholders , comparing the liquidation route. At this juncture it is worth to devote few more lines that group companies have been created within the parameters of law as a special purpose vehicle hardly holding independent valuable assets but burdened with liability, Which may cause disadvantage if segregated. But after consolidation all the liabilities pooled together can be satisfied up to large extent against the value of common pooled assets, which are otherwise in control of a single entity . In this group Licenses , Good-will, Permits, Trade-marks etc. are valuable but scattered all over the group entities. One more valuable asset is Oil Gas field acquired through joint venture and duly taken as a valuable property by the banks while granting loan. So all are to be consolidate which shall create a high value cumulative asset, going attract an equally high value Resolution Plan. Singly it is a far sight. Therefore apart from all other reasons inter-alia, the existence of Reeva oil-field in the common pool of assets is a good reason for propounding Consolidation . 82. Decisively, the above discussion has deciphered cases of this group into two categories. Rather ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Although in all 15 cases, the accounts are inter-mingled and due to the existence of agreements, there is a relationship of obligor and/or co-obligors among all these entities. But it is necessary to further ascertain the position of advantage or disadvantage qua the stakeholders. In other words, if an entity is self-serving, self-dependent and self-sustainable, a view can be taken for not granting consolidation. This Bench has therefore, gone further in detail to examine the financial position of each such entities, albeit having inter-connected accounts. However, noticed that for the purposes of carrying on the business they are not inter-dependent. The cases for which this Bench is of the view that consolidation is neither beneficial nor advisable are listed below after due diligence remarks : a. KAIL Ltd. : An application u/s 9 against the Corporate Debtor KAIL Ltd. was submitted by an Operational Creditor Cooltech Appliances, which was admitted vide an order of 08.06.2018. KAIL is engaged in the business of manufacturing and trading various consumer electronic goods and home appliances, such as washing machines, air conditioners, air coolers, television and other electric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plan and this company, which has a good asset value would be treated at par with the other companies, which may be detrimental to this company s resolution plan, as and when received. I, therefore hold that CIRP proceedings of M/s Trend Electronics shall run independently and Consolidation is denied. 84. As far as MA No. 1574 of 2018 filed by ATC Telecom Infrastructure Pvt. Ltd. is concerned, Videocon Telecommunications Ltd. (VTL) cannot be allowed to stand outside the CIRP. This application is filed by an operational creditor with a sole concern that the share of the operational creditor would be reduced if the CIRP of VTL is consolidated with that of other companies. It is hereby held that this is not a reason enough to keep this company out of consolidation keeping in view the financial position of this company. The judgement of the Apex Court, tendered by the Ld. Counsel in this application, i.e. 63 Moons Technologies (supra) has no relevance in the insolvency arena as the same was in respect of mergers under the Companies Act. As against that, presently having a completely different issue in hand. What is adjudicated here is the consolidation of CIRPs of the Corporate Deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Debtors have been kept out of consolidation, therefore, their respective independent Balance Sheet should be made the basis for preparation of Information Memorandum as on 31.03.2018. As far as the question of liabilities of the consortium of banks is concerned , those are to be ascertained independently and for that a simple calculation method i.e. proportionate to the value of assets of these two Corporate Debtors, be computed for preparation of Information memorandum. The RP being a professional and expert of preparation of Statement of Accounts, hence, hereby given a liberty to adopt any other method through which the nexus between the liabilities of the Financial Creditors be established with the assets of the debtor company so that the asset-liabilities evaluation be precisely computed. It is expected that after ascertainment of true and correct picture of assets and liabilities of these two Corporate Debtors and on advertisement of EoI, some legitimate and serious Resolution Applicants may appear with a Resolution plan. 89. Commencement of CIRP period : The directions as listed above are to be carried out as well as to be completed within the period of 180 days as prescr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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