Consolidation of CIRP Under Insolvency and Bankruptcy Code: Radico Khaitan Ltd v. BT & FC Pvt Ltd and Ors

Introduction

The case of Radico Khaitan Ltd v. BT & FC Pvt Ltd and Ors adjudicated by the National Company Law Appellate Tribunal (NCLAT) on March 26, 2021, addresses the critical issue of consolidating multiple Corporate Insolvency Resolution Processes (CIRP) under the Insolvency and Bankruptcy Code, 2016 (I&B Code). The appellant, Radico Khaitan Ltd., an operational creditor, sought consolidation of two separate CIRPs involving BT & FC Pvt Ltd (Respondent No. 1) and Bengaluru Dehydration and Drying Equipment Company Pvt. Ltd. (Respondent No. 2). The core dispute revolves around whether the interconnectedness of these entities justifies a unified insolvency proceeding, thereby enhancing the efficacy of the resolution process.

Summary of the Judgment

The NCLAT upheld the appellant's appeal, allowing the consolidation of CIRP for Respondent Nos. 1 and 2. Initially, the National Company Law Tribunal (NCLT) Bengaluru Bench had rejected the consolidation application, deeming the appellant an operational creditor without locus standi and finding no substantial grounds for consolidation. However, upon appeal, the NCLAT examined eight parameters indicating common control, shared directors, intertwined assets and liabilities, inter-dependence, pooling of resources, intricate links, and common financial creditors. The tribunal concluded that these factors sufficiently demonstrated that Respondent Nos. 1 and 2 should undergo a consolidated CIRP. Consequently, the impugned order was set aside, and the consolidation was permitted, mandating the appointment of a single Resolution Professional/Liquidator for both entities.

Analysis

Precedents Cited

The appellant relied on several key judgments to support the consolidation of CIRPs:

State Bank of India vs. Videocon Industries Ltd. (2018): This case established parameters for consolidating CIRPs, emphasizing factors like common control and inter-linked operations.
Swiss Ribbons (P) Ltd. vs. Union of India (2019): The Supreme Court elucidated the principles of insolvency resolution, particularly pertaining to corporate groups and their interconnectedness.
Essar Steel India Ltd. vs. Satish Kumar Gupta (2019): This judgment highlighted the necessity of demonstrating significant interdependence and shared control for CIRP consolidation.

These precedents collectively underscore the judiciary's inclination towards facilitating efficient insolvency resolution through consolidation when substantial interlinkages exist between entities.

Legal Reasoning

The NCLAT employed a structured approach to evaluate the consolidation application, focusing on eight critical parameters:

Common Control: Both companies were promoted and controlled by Mr. M.V. Murlidher and his family, holding majority shares and having common directors, indicating unified ownership.
Common Directors: Shared directors fostered a unified decision-making process, bridging operational and strategic aspects of both companies.
Common Assets: Shared immovable properties and operational dependencies indicated intertwined business operations.
Common Liabilities: Joint liabilities and shared financial creditors underscored financial interdependence.
Inter-dependence: Operational dependencies, such as one company running a bottling plant in the warehouse of the other, highlighted functional interlinkages.
Pooling of Resources: Combined resources and shared financial strategies indicated a cohesive operational framework.
Intricate Links Between Companies: The association and significant influence over each other pointed towards a de facto single economic entity.
Common Financial Creditors: Shared creditors reinforced the interconnected financial ecosystem requiring unified resolution.

The tribunal meticulously analyzed each parameter, concluding that the combined significance of these factors warranted the consolidation of CIRP, thereby facilitating a more streamlined and effective resolution process.

Impact

This judgment sets a significant precedent for future insolvency proceedings, particularly in cases involving corporate groups or interconnected entities. By delineating clear parameters for CIRP consolidation, the NCLAT provides a robust framework that can enhance the efficiency of the insolvency resolution process, reduce redundancy, and protect the interests of secured creditors more effectively. This decision encourages a holistic assessment of corporate structures during insolvency, promoting greater accountability and strategic resolution planning.

Complex Concepts Simplified

To aid comprehension, the following legal terminologies and concepts are clarified:

CIRP (Corporate Insolvency Resolution Process): A structured procedure under the I&B Code aimed at resolving insolvency and facilitating the revival of financially distressed companies.
Operational Creditor: A creditor that supplies goods or services necessary for the daily operations of the debtor's business, ranked sixth in the hierarchy of claims during insolvency.
Locus Standi: The legal standing or right of a party to bring a case to court, based on their stake in the matter.
Resolution Plan: A proposal submitted by potential resolution applicants outlining how they intend to revive the insolvent company, repay creditors, and ensure business continuity.
Moratorium: A legal freeze on all debts and legal actions against the debtor company, providing a breathing period to formulate a resolution plan.
Consolidation of CIRP: Combining multiple insolvency proceedings involving related entities into a single process to streamline resolution efforts.

Conclusion

The Radico Khaitan Ltd v. BT & FC Pvt Ltd and Ors judgment underscores the judiciary's proactive stance in enhancing the insolvency resolution framework by permitting the consolidation of related CIRPs. By establishing clear criteria for consolidation based on control, shared management, common assets and liabilities, and interdependencies, the NCLAT facilitates a more efficient and effective resolution process. This decision reinforces the objective of the I&B Code to prioritize corporate revival over liquidation, ensuring that intertwined entities receive a unified approach to insolvency resolution. Consequently, this landmark ruling will influence future insolvency proceedings, promoting comprehensive assessments of corporate structures to achieve optimal outcomes for all stakeholders involved.