The Insolvency and Bankruptcy Code, 2016 (IBC), is a landmark legislation in India that provides a structured framework to handle the insolvency and liquidation of businesses. Its primary aim is to streamline the resolution process for distressed companies while maximizing asset value for creditors. When the IBC was introduced, it focused solely on individual corporate entities, as the infrastructure and legal framework required for more complex cases, such as group insolvencies, were not in place.
What is Group Insolvency?
Group insolvency refers to a situation where multiple entities within a corporate group—a parent company and its subsidiaries or affiliates are in financial distress. These entities are often interconnected through shared operations, finances, or management, making it inefficient and impractical to resolve their insolvency issues independently. Resolving group insolvencies under a unified framework can help maximize value, prevent conflicting decisions, and address overlapping creditor claims effectively.
Why Was Group Insolvency Left Out of the IBC Initially?
When the IBC was enacted, India lacked the legal infrastructure, judicial expertise, and procedural clarity to deal with the intricacies of group insolvencies. Handling insolvencies for interconnected companies involves unique challenges, such as differentiating shared assets and liabilities, tracing related-party transactions, and determining the jurisdiction of proceedings. The government and judiciary opted to focus on individual insolvencies first to build experience and ensure the effective implementation of the IBC.
The Growing Need for Group Insolvency Provisions
Modern corporations often utilize subsidiaries and engage in related-party transactions to expand their operations. India ranks 20th globally in related-party transactions, demonstrating the interconnected nature of its corporate structures. Despite this, the IBC adheres to the principle of “separate legal entity,” derived from the landmark case Salomon v. Salomon & Co., which treats each company in a group as an independent entity.[1]
While this principle is foundational, courts have occasionally pierced the corporate veil, treating groups of companies as a single economic entity. This approach recognizes the operational interdependence of group companies, particularly in situations involving fraud, misconduct, or shared assets and liabilities.[2]
Judicial Evolution and Challenges
Indian courts and tribunals have taken steps to acknowledge group insolvency through landmark rulings:
- Videocon Group Case (NCLT): The tribunal directed insolvency proceedings for 13 Videocon companies to be consolidated under a single process. This was justified by their shared directors, assets, and financial operations, demonstrating the need for treating them as a single entity.
- Edelweiss v. Sachet Infrastructure (NCLAT): The appellate tribunal ordered joint insolvency proceedings for a group of five companies with common assets. It emphasized the benefits of consolidated proceedings for better asset utilization and creditor satisfaction.
- Supreme Court’s Role: Cases like Chitra Sharma v. Union of India and Bikram Chatterji v. Union of India highlighted the necessity for group insolvency provisions.[3] For instance, the court mandated the attachment of parent company assets in insolvency cases involving group entities like the Amrapali Group.
These rulings underline a judicial willingness to adopt a group insolvency approach, even in the absence of specific provisions in the IBC.
Recommendations from the Working Group on Group Insolvency
Recognizing the challenges posed by group insolvency, the Insolvency and Bankruptcy Board of India (IBBI) formed a Working Group in 2019, chaired by U.K. Sinha.[4] The group proposed a phased framework focusing on procedural coordination, substantive consolidation, and rules against perverse behaviour:
- Procedural Coordination Mechanisms (Phase 1):
- Coordination among insolvency professionals, courts, and creditors.
- Appointment of a single insolvency professional and adjudicating authority for group companies to streamline proceedings and reduce costs.[5]
- Substantive Consolidation (Future Phase):
- Merging the assets and liabilities of group companies into a single pool.[6]
- While beneficial for creditor satisfaction, this approach is complex and recommended for later phases.
- Rules Against Perverse Behaviour:
- Preventing fraudulent activities and misuse of resources within group entities.[7]
- Establishing clear accountability for group-level transactions.
Initially, the framework is recommended only for domestic group companies, with potential expansion to cross-border cases as India’s legal infrastructure matures.
Key Challenges and Proposed Solutions
Despite these progressive steps, implementing group insolvency in India faces several challenges:
1. Defining ‘Corporate Group’
The Working Group defines a corporate group as including holding, subsidiary, and associate companies. However, this definition is criticized for being vague and potentially excluding some group structures, such as horizontally integrated entities.[8]
Proposed Solution:
- Adopt a more inclusive definition based on “Center of Main Interests” (CoMI), which focuses on the group’s operational and financial control.
- Clearly define terms like “commercial understanding” to reduce ambiguity and litigation.
2. Jurisdictional Issues
The recommendation to assign a single adjudicating authority (where the first insolvency application is filed) has raised concerns about fairness and efficiency. Stakeholders argue this approach might lead to forum shopping and increased complexity.[9]
Proposed Solution:
- Use CoMI to determine jurisdiction, as it better reflects the operational hub of group companies.
- Allow multiple adjudicating authorities in exceptional cases, as practiced in Germany, to balance efficiency and stakeholder interests.
3. Cross-Border Insolvency
Cross-border insolvency is particularly challenging for multinational corporations operating in multiple jurisdictions. The lack of clear rules for determining CoMI for group entities complicates proceedings.
Proposed Solution:
- Replace the “registered office test” with the “head office test” to identify CoMI based on the group’s primary decision-making location.
- Develop mechanisms for coordinated cross-border proceedings to ensure consistency and efficiency.[10]
4. Extension of Liability
The principle of separate legal entities protects parent companies from liabilities of their subsidiaries. However, courts have occasionally pierced the corporate veil to hold parent companies accountable for fraud or misconduct.[11]
Proposed Solution:
- Provide explicit provisions in the IBC to address liability extension in group insolvency cases.
- Limit liability to instances where parent companies or directors are directly involved in fraudulent activities or mismanagement.
Current Legal Perspectives and International Comparisons
Other Indian laws, like the Companies Act, 2013, and the Competition Act, 2002, have started recognizing group companies as single economic entities. For instance:
- The Companies Act mandates consolidated financial statements for subsidiaries.
- The Competition Commission of India has upheld the single economic entity principle for agreements within group companies.
Internationally, the UNCITRAL Model Law on Cross-Border Insolvency provides a template for handling group insolvencies. It emphasizes CoMI as the basis for jurisdiction and supports procedural coordination and substantive consolidation.
Benefits of a Group Insolvency Framework
- Enhanced Value Realization: Consolidating assets and liabilities can maximize creditor recoveries and reduce operational inefficiencies.
- Streamlined Proceedings: Coordinated insolvency processes save time and resources, benefiting stakeholders.
- Prevention of Fraud: Rules against perverse behaviour ensure accountability and transparency within group companies.
- Alignment with Modern Business Practices: Recognizing group entities reflects the interconnected nature of contemporary corporations.
Conclusion and the Way Forward
The IBC’s evolution has been significant, and introducing a group insolvency framework marks a critical milestone. The recommendations by the Working Group provide a solid foundation, focusing on procedural coordination and a phased approach. However, refinements are essential to address challenges around definitions, jurisdiction, cross-border insolvency, and liability.
The road ahead involves balancing innovation with caution. Starting with procedural coordination, as recommended by the Working Group, provides a low-risk way to test the framework. Gradually incorporating substantive consolidation and addressing cross-border complexities can follow as the system matures.
addressing group insolvency is not merely about managing financial distress it is about ensuring that India’s insolvency framework evolves in step with the realities of the globalized corporate world. By doing so, the IBC can continue to play a transformative role in shaping India’s economic future, fostering trust, and supporting sustainable growth.
[1] Salomon v A Salomon & Co Ltd [1897] AC 22 (HL).
[2] Tata Engineering & Locomotive Co Ltd v State of Bihar (1964) 6 SCR 885.
[3] Chitra Sharma v Union of India (2018) 18 SCC 575.
[4] Irit Mevorach, ‘Appropriate Treatment of Corporate Groups in Insolvency: A Universal View’ (2007) 8 European Business Organisation Law Review 179.
[5] Insolvency and Bankruptcy Board of India (n 12) 31.
[6] State Bank of India v. Videocon Industries Ltd. &Ors M.A 1306/ 2018 & Ors. in
CP No. 02/2018 & Ors- decision dated 08.08.2019.
[7] Insolvency and Bankruptcy Board of India (n 12) 60.
[8] Insolvency and Bankruptcy Board of India (n 12) 28.
[9] Insolvency and Bankruptcy Board of India (n 12) 42.
[10] Insolvency and Bankruptcy Code 2016, s 3(23) (India).
[11] Life Insurance Corporation Ltd v Escorts Ltd & Ors AIR 1986 SC 1370.
Author: Aditya Kumar, 2nd year(4th semester) student pursuing B.B.A.LL.B (Hons.) at Chanakya National Law University, Patna.
