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The exigency of Group Insolvency Provisions under Insolvency and Bankruptcy Code, 2016

Umang Pathak[i]


On 12th March 2020, the National Company Law Appellate Tribunal (“NCLAT”) in Union of India v. Infrastructure Leasing & Financial Services Ltd. held that since there is no provision for ‘group insolvency’, no application under Sections 7 or 9 or 10 of the Insolvency and Bankruptcy Code, 2016 (“I&B Code”) can be filed against Infrastructure Leasing & Financial Services Ltd. (“IL&FS”) and its entities. This precedent accentuates the dilemma that the judiciary faces in these economic legislations where there is some sort of limitation in judicial review. Although, various courts have attempted to fill this lacuna by going forward with one insolvency proceedings for group companies, yet it’s the task of the legislative to include express provisions and clarity in these situations.

In this article, the author shall firstly elucidate the concept of group insolvency and the current developments regarding it. Then, the author shall proceed with discussing the key facts of the IL&FS judgment and it’s holding. With the help of judicial precedents and legal literature on the aforementioned topic, the author shall provide a critical overview of the IL&FS decision. Finally, the piece shall conclude by identifying the issue of group insolvencies, emphasizing the need for such express provisions under the I&B Code and the possible way forward.

Group Insolvencies – An Introduction

With the enactment of the I&B Code, India put in place a robust market mechanism for timely and time-bound resolution of corporate distress. Evidence suggests that IBC had been a huge success in resolving disputes and revival of distressed companies on the verge of bankruptcy and liquidation. The I&B Code caters to most possibilities in the situation of insolvencies but only regarding one single corporate debtor at a time. The reason behind this is the strive for a timely dispute resolution procedure and the prevention of multiple challenges in different judicial fora to different corporate debtors for a single claim or default. However, in the present-day circumstances of globalization, where companies indulge in practices such as cross collateralizations, inter-corporate loans, and buying out majority shares in different companies, the I&B Code doesn’t envisage a mechanism to deal with the insolvency of such a group of companies. Furthermore, the corporates strategically shield their principal company from going into insolvency proceedings by only dealing with creditors through their subsidiary companies, thereby limiting their debt liabilities.

Group insolvency refers to a mechanism that deals with the insolvency of multiple companies by restructuring them into one single entity and utilizing those consolidated assets for the best interests of both the corporate debtor and the creditors. Courts are reluctant to opt for this sort of mechanism because of the fundamental legal principle vide Salomon v. Salomon which is a separate legal entity of a company. Group insolvency would require the courts to lift the corporate veil which would identify those corporate entities working behind the separate legal status of that company. Concerning group insolvencies in India, numerous judicial precedents have allowed for the lifting of the corporate veil and went ahead with corporate resolution insolvency procedure (“CIRP”) under the I&B Code. However, in the IL&FS decision, the NCLAT took a rather restrictive approach availing a different remedy under the Companies Act, 2013 (“CA”).

Facts and Holding of the IL&FS case

IL&FS and its group companies, regarded as Systematically Important Non-Deposit Accepting Non-Banking Finance Company (NBFC-ND-SI), had been defaulting on its debt obligations for over two years and having encompassed a debt of over Rs 90,000 crores, filed for CIRP under S.10 of the I&B Code. Considering the detrimental impact on the financial market, the central government, after observing the sheer negligence and irresponsibility in regulating and monitoring the debt liabilities of the firm, filed a claim for mismanagement of public funds under S. 241 and S. 242 of the CA. By way of an order dated October 1, 2018, the National Company Law Tribunal (“NCLT”) invoked its powers under Sections 242, 246 r/w 339 of the CA and granted the interim prayer of suspending the existing Board of Directors and reconstituting the same with the six persons proposed by the Centre. The NCLT relied on the lack of express provisions of group insolvencies under the I&B Code. The NCLAT also took a similar stance and upon exercising its ample powers under s. 242(2) of the CA, went ahead with a similar sort of insolvency procedure per the I&B Code. Primarily, both the tribunals understood that the revival and debt recovery of IL&FS were imperative and crucial since this company was associated with numerous financial intermediaries in different sectors of the economy. If this company would collapse, those intermediaries who avail of financial services such as sourcing funds through debt, deposits or other securities from these group companies would most likely collapse too, thereby detrimentally affecting the economy.

Critical Overview – Judicial Practice

There have been numerous judicial precedents where the courts have attempted to take recourse to the insolvency of group companies, despite its absence of provisions under the I&B Code.

In Edelweiss Asset Reconstruction Company Limited v. Superlative Infrastructure Pvt. Ltd., the same tribunal (while taking note of the commonality of the interests concerning the agreements, projects, and guarantees of all different constituents and the allottees) clubbed together with the claims against different corporate debtors into one and went ahead with the insolvency proceedings against the principal borrower. In State of Bank of India v. Videocon Industries ltd., the adjudicating authority consolidated claims against 13 sister companies of Videocon into one as all the assets and liabilities of these subsidiaries were jointly and intricately intertwined to the parent company. In both of the aforementioned precedents, the courts observed the inter-connectedness of the associated companies, to restructure and consolidate its assets and liabilities for the purpose of group insolvency. The author believes that NCLAT, in the IL&FS decision, should have taken cognizance of the six major subsidiaries of IL&FS namely – IL&FS Transportation Networks Ltd, IL&FS Financial Services Ltd, IL&FS Energy Development Company Ltd, IL&FS Tamil Nadu Power Company Ltd, Noida Toll Bridge Ltd, and IL&FS Engineering and Construction Ltd which constituted over 60% of assets of the IL&FS group companies. Apart from these six companies, several other sister companies affected the operations of the principal company by defaulting and accumulating a huge amount of loans which led to such insolvency situations. The author believes that this inter-connectedness and the possibility of applying such group insolvency mechanisms by looking at previous judicial precedents should have been factors for the tribunal to go forward with the insolvency proceedings. In Chitra Sharma v. Union of India, where insolvency proceedings had been initiated against Jaypee Infratech Ltd. but homebuyers had entered into contracts with both Jaypee Infratech Ltd. and its parent company Jai Prakash Associates Ltd., the Supreme Court ordered that the parent company which was not subject to the insolvency proceedings at that time, deposit money before the court. The I&B Code also envisions the concept of ‘related parties’ under section 5(24) and ineligibility provisions under Section 21 and 29A, which conveys that despite express provisions, the intention of the legislature would not prohibit such group insolvency framework.

In the various judicial precedents cited above, the courts have attempted to resolve this situation by aligning with the intention and the scheme of the I&B Code. The objective of the Code is to prevent multiple insolvency proceedings and resolve the disputes in a time-bound manner which infers that such a framework, wherever possible, should be implemented to achieve these and also to protect the assets of the corporate debtor. However, the author also understands that because of limited judicial review in economic legislation, and especially the I&B Code as held in the Swiss Ribbons Pvt. Ltd. v. Union of India, there is reluctance towards going forward with the group insolvency framework. A literal interpretation on this front should be disregarded when there is a possibility to resolve this lacuna per the objectives of the act and intention of the legislators.

Concluding Remarks

It’s imperative for legislators to keep in check some fundamental principles of policy drafting such as clarity, certainty and uniformity before enacting economic legislation such as the I&B Code. Through judicial precedents, the courts have attempted to cater to these situations within the statutory limit of the Code, yet the IL&FS decision seemingly shut down doors for numerous group companies and its associated creditors to opt for this group insolvency framework. Despite lacking express provisions, some decisions established insolvency for group companies within the Code, and this decision has only furthered the ambiguity. However, there are challenges with implementing this group insolvency framework as well. For cross border insolvencies of companies, there is an issue regarding the uncertainty of which country can exercise its laws and jurisdiction. Therefore, the UNCITRAL Model Law on Cross Border Insolvency provides a framework where a foreign representative will be appointed by each state involved to administer the reorganization or liquidation of the debtor’s assets. The author believes that the recommendations made in “Working Group on Group Insolvency” submitted by the Insolvency and Bankruptcy Board of India can be taken into consideration by the legislators. The recommendations such as a joint CIRP application against group entities, the common adjudicating authority to administer these insolvency proceedings, the formation of group COCs without supplanting ‘substantive rights of creditors’ and the appointment of a common RP in case there is no ‘conflict of interest’ and subject to ‘availability of resources’ seems sound and reasonable to provide for insolvency of group companies under the I&B Code. To prevent corporates from taking advantage of such lacuna and protect the interest of creditors, the legislators should formulate clear and express provisions in this regard under the Code.


[i] Umang Pathak is a fourth-year law student at Jindal Global Law School, Sonipat, Haryana. His interest lies in Real Estate, Construction, and Insolvency Laws. For any discussion related to the article, he can be contacted via mail at Preferred Citation – Umang Pathak, “Exigency of Group Insolvency Provisions under Insolvency and Bankruptcy Code, 2016”, Arbitration & Corporate Law Review, Published on 26th October, 2020.

The Exigency of Group Insolvency Provisi
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This article was reviewed by Bodhisattwa Majumder and Ritika Acharya.

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