Hope for financially stressed subsidiaries of overseas companies

Overseas companies entering the Indian market through the wholly owned subsidiary route do so with hope and expectation. While the majority of ventures have worked out well, there have been instances where the subsidiary failed to take off or encountered operational issues requiring hard decisions on its operations in India.

When faced with such challenges, the subsidiary’s logical option is to sell the business to another company that can take over the work and ecosystem it has established. However, if the business owns intellectual property that has to be protected or if it is not mature enough, the overseas management of the subsidiary should consider either voluntarily liquidating it or voluntarily reorganising the business.

Should an Indian subsidiary opt for voluntary liquidation, it is imperative that the company has not already defaulted on any of its debts. If the company is unable to repay a debt on which it has defaulted, it has to submit to an insolvency resolution process under the relevant provisions of the Insolvency and Bankruptcy Code, 2016 (IBC). However, in the event that the company has not yet defaulted on its debts, it can opt for voluntary liquidation. It can do this by obtaining an audited statement of accounts for the preceding two years or for the time since its incorporation, whichever is shorter, from the company board of directors together with a declaration from the board that the company is unable to pay its debts in full. Following such a declaration, the subsidiary must obtain the approval of the holding company to appoint a liquidator and voluntarily liquidate the company by special majority or resolution. Under this procedure, the company may then be liquidated by the National Company Law Tribunal (NCLT) by way of a dissolution order.

However, if the company wishes to continue business in India it has the option of voluntary reorganisation, which is based on the concept of operational continuity as a going concern. Contrary to the condition for voluntary liquidation that there must have been no default on a debt, a company that is unable to repay its debts may still opt for voluntary restructuring under the IBC provided that the company’s debts meet the minimum threshold of INR1 million (USD12,000).

The corporate debtor must file an application to the NCLT after its shareholders pass a special resolution. Once the NCLT accepts the case, it will order the corporate insolvency resolution process (CIRP) to begin. Once the CIRP commences, an interim resolution professional is appointed. The resolution professional has the task of carrying out the procedures involved in the entire insolvency and bankruptcy process. The interim resolution professional manages the business of the corporate debtor on a going concern basis, that is ensuring that the company is financially stable enough to meet its obligations and to resume operations. With the appointment of the resolution professional, the board of directors of the company is suspended. Once the CIRP nears completion, the resolution professional appointed by the committee of creditors (CoC) invites the submission of resolution plans containing proposals for resolving the insolvency of the company. If the CoC accepts a resolution plan with the approval of over 66 per cent of members, it is submitted to the NCLT for approval.

As opening a resolution process exposes the corporate entity to risk, the foreign management can also reorganise its affairs by entering into compromises or schemes with its creditors or members after obtaining approval from the NCLT for such schemes. Once the application has been made, the NCLT, having appointed a chairperson, will proceed to hold meetings of creditors or shareholders for the approval of the scheme. Once the procedures for the approval of the scheme have been dealt with and the scheme has been approved by a majority of three-quarters of the company’s members or shareholders, the company may file a petition with the NCLT requesting the approval of the scheme. Once this has been done, if there are no objections to the implementation of the scheme, the NCLT will approve it.

These options now offer overseas holding companies quick and flexible methods of settling their affairs in India. However, they must be carried out quickly if the company is not to lose value.

Gautam Khurana is the managing partner and Bharat Khurana is an associate at India Law Offices.

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