Page 32 - Banking Finance August 2024

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insolvency of Group companies. They are Substantive
Consolidation and Procedural Coordination. Let's look into
the features of these approaches:
a) Substantive Consolidation - In this approach, the
assets and liabilities of the multiple entities within the
corporate group are pooled together and consolidated
in order to create a single insolvency estate. The
proceeds thereof are then utilized for the purpose of
reorganization or distribution in cases of liquidation.
However, this approach is often criticized for
disregarding the 2 basic tenets of modern-day corporate
law viz. Limited Liability and Separate Legal entity
status. Hence, it is mostly used when the adjudicating
authority is of the opinion that the assets of the group
members are intermingled in such a fashion that
identification of the individual owner is very difficult and
any attempt to do so might result in disproportionate
duplication of work and enables better co-ordination
expense or delay. Besides, the court may also resort to
between creditors. The benefits of procedural co-
this method, if it is of the opinion that certain fraudulent
ordination will vary on case-to-case basis depending on
activities or transactions have been done by the group
entities and substantive consolidation is the only means the level of inter linkages among the group entities.
to rectify those activities/ transactions.
Global Instruments related to Group
Substantial Consolidation, though considered as a radical
remedy, is permitted in insolvency laws of certain Insolvency Mechanism
countries like Australia and New Zealand. Specific UNCITRAL Legislative Guide to Insolvency Law, Part 3 -
provisions have been enacted in these jurisdictions to United Nations Commission on International Trade Law
guide courts in this regard. In other countries such as (UNCITRAL) has done a lot of work with regard to Insolvency
US, substantive consolidation has evolved out of legislation. Their publications serve as a reference tool for
practice. national authorities and legislative bodies during framing
and modification of insolvency laws for their respective
b) Procedural Coordination - This approach of group jurisdiction. Till date five (part 1 to 5) parts have been
insolvency is more geared towards synchronization of
published by UNCITRAL. Part 3 was adopted on 1st July 2010
the procedural aspects of the insolvency proceedings as and deals exclusively on the topic of: Treatment of
opposed to mingling of group companies per se. This Enterprise Groups in Insolvency.
approach necessitates creation of an enabling
framework (by means of legislations, rules or practice) UNCITRAL Model Law on Enterprise Group Insolvency
for coordinating insolvency proceedings of group (MLEGI) - Colloquially referred to as the "Model Law", this
entities. Rules may to be set for various procedural was adopted on 15th July 2019. The model law is a
aspects like joint application for insolvency initiation, complementary document to the above referred legislative
Appointment of Common Resolution Professional, guide Part 3. The focus of the Legislative guide is on domestic
common group Committee of Creditors (COC) etc. in
group insolvency. On the other hand, the model law
order to synchronize the insolvency proceeding(s). The concentrates on resolution of insolvencies involving
applicable rules may be chosen by the stakeholders as
multinational enterprise groups.
per the operating compulsions of each proceeding which
may vary on a case to case basis.
EU regulation 2015/848 on Insolvency Proceedings -Also
The obvious benefit of this approach includes reduction referred to as the "recast regulation", this piece of legislation
of administrative cost and time for conducting insolvency deals with enforcement of insolvency proceedings in the
proceedings. Besides, it also results in avoiding European Union. It came into force in June 2017.

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