October 23, 2021

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NCLT AND NCLAT views on group consolidation and insolvency

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This article has been written by Shankarlal Raheja, pursuing the Certificate Course in National Company Law Tribunal (NCLT) Litigation from LawSikho.

Table of Contents

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In most of the states including the United states of America, there exists  no statutory provision for group consolidation, therefore it is derived out of the equitable powers of the courts instituted by Bankruptcy Code, what consolidated insolvency necessarily means is that the assets of two or more than two businesses of the same company are consolidated together or pooled together to realize the liabilities of one of the businesses.

The definition of a group of companies under the new Companies Act defines a group of companies as two or more companies that share a holding company or subsidiary relationship. A holding company in relation to the subsidiary is defined as a legal person or undertaking that controls a subsidiary. Therefore, the determination of whether a company is a holding company depends on one of the following:

  1. the ability of the holding company to directly or indirectly exercise, or control the exercise of, a majority of the general voting rights at a general meeting, or
  2. the right to appoint or elect, or control the appointment or election of, directors of that company who would control a majority of the votes at a board meeting, or
  3. all the general voting rights associated with issued securities of the company are held or controlled by persons contemplated in (1) and (2).

The doctrine of substantive consolidation lies in the principle of lifting of corporate veil in order to determine whether the subsidiary company can be seen in unison with the another subsidiary company, and if there can be horizontally pooling of resources rather than a vertical pooling i.e. when assets of parent and subsidiary company is pooled together. The NCLAT in the case of Ashok B Jiwrajka, Director of Alok Industries Ltd v Axis Bank Ltd has been of the view that a moratorium order passed in favor of a parent company shall not interfere with the insolvency proceeding of the subsidiary. 

In the current era group entities often are engrossed in related party transactions including inter-corporate loans, offer multiple intermingled collaterals, interdependence, the interlacing of finances or inter corporate and cross guarantees etc. While each corporate enjoy a status of separate juristic personality or a separate legal entity the day to day business practices reflect imperative interlinkages in business, operations and management, therefore these practices pose significant challenges in the event of default or insolvency. Major large conglomerate have multiple group entities and subsidiaries and the collective default by the Videocon group entities or by ILFS group entities has highlighted the need to lift the corporate veil, and regulate the insolvency of groups.

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The Insolvency and Bankruptcy Code, 2016 (IBC) fails to take into consideration various inter se financial and operational links and or insolvency and or financial re-organisation of groups and large conglomerates. Nonetheless, the courts are appreciating the existence of this reality while adjudicating upon insolvency matters. In Jaypee group and Amrapali group, the Apex Court directed the parent company in the former to deposit money, while the properties of the latter group were attached and bank accounts frozen disregarding the separate legal identity of the companies.

Given the business environment and perverse corporate behaviour or abuse group holding structures leading to unfair treatment of certain stakeholders,, IBBI taking note of the current business practices and shortcomings in the IBC has set up a Working Group on Group Insolvency (WG). Post consultation and deliberation the in its report have compiled its recommendations highlighting the principles that will form the basis of corporate group insolvency regulatory framework (CIRP) in the country. The group insolvency regulations can lead to increasing the value of the group entities, avoid multiple insolvency proceedings and related costs.

Videocon case

It was rightly stated in the Videocon case by the NCLAT that the power to consolidate is one arising out of equity, enabling a bankruptcy court to disregard separate corporate entities, to pierce the corporate veil in order to reach assets for the satisfaction of debts of a related corporation.

The consolidated insolvency process affects the assets to liabilities ratio and more importantly and has a direct effect on the rights of the Board of Directors of the companies whose assets are pooled together, therefore, consolidation can be repelled by the corporate debtors as well as creditors. 

The major hindrance faced in consolidation is that the creditors of a debtor who have a higher asset-to-liability ratio have to lose to the extent that the asset-to-liability ratio of the merged estates is lower than what was calculated for independent debtor previously and therefore acts contrary to the presumption of dependency of corporate debtor on the overall assets of the company. Furthermore, consolidation also confers a greater responsibility on the tribunals to ensure that the independence and maintenance of distinct legal entities by a company is not affected unnecessarily.

Binani Industries Ltd & Ors. v. Bank of Baroda & Ors.

It has been held in the case of Binani Industries Ltd & Ors. Vs. Bank of Baroda & Ors., that similar treatment provided to both operational as well as financial creditors by proving them with ‘liquidation value’ on the basis of misplaced notion and misreading of Section 30(2)(b) of the ‘I&B Code’, then in such case no creditor will supply the goods or render services unless an  advance payment is provided, which will be against the basic principle of the ‘I&B Code’, validate discriminatory practices and will also affect the Indian economy. Therefore, it becomes pertinent to strike a balance between the rights of the two when emphasis is laid on maximization of the assets of the ‘Corporate Debtor’. 

The Indian Insolvency and Bankruptcy code does not expressly states the provision for consolidation of assets, however the Act keeps open the ambit of power and conferred upon the National Company Law Tribunal and the Appellate Tribunal and the discretion has been exercised by the tribunal in various instances. The framers of the Code believed that introduction of Insolvency code was a complex issue and the jurisprudence around the same had to be developed gradually.

Edelweiss Asset Reconstruction Company Limited v. Sachet Infrastructure Pvt. Ltd. 

In the landmark case in the real estate sector of the Edelweiss Asset Reconstruction Company Limited v Sachet Infrastructure Pvt Ltd the National Company Law Appellate Tribunal’s (NCLAT) via a judgement on September 2019 consolidated insolvencies of five related entities. For the purpose of determining whether the insolvencies were to be consolidated the NCLAT examined various operational links existing between the various related entities for conducting development of a township project, and consolidation was deemed pertinent to have the interests of the homebuyers’.

Moons Technologies Ltd. & Ors V. Union of India & Ors

However, in the case of Moons Technologies Ltd. & Ors V. Union of India & Ors, Order dated 30.04.2019, the proposition that Section 396 of the Companies Act, 2013 i.e. though conferred a “Power of Central Government to provide for amalgamation of companies in public interest” but the same ought not to be misconstrued to lead to arbitrary results. The fact that Central Government id decides to exercise its power conferred by section 396 of the Companies Act, 2013, does not put it outside the scope of judicial review.

Further, in the case of State Bank of India v. Videocon Industries Limited & Ors, NCLT, Mumbai Order dated 08.08.2019 that there are elementary governing factors, to activate the process of ‘consolidation’ and provided an inclusive list for the same it included (1) Common control, (2) Common directors, (3) Common assets, (4) Common liabilities, (5) Inter-dependence, (6) Interlacing of finance, (7) Pooling of resources, (8) Co-existence for survival , (9) intricate link of subsidiaries 10) inter-twined of accounts, 11) inter-looping of debts, 12) singleness of economics of units, 13) cross shareholding, 14) Inter dependence due to intertwined consolidated accounts, 15) Common pooling of resources, etc. This is not an exhaustive list.

Axis Bank Limited and others v Lavasa Corporation Limited

In the case of Axis Bank Limited and others v Lavasa Corporation Limited, the NCLT via an order dated 26 February 2020 held that the parent insolvency effects the insolvency procedure of the subsidiary insolvency. Thereby, necessitating the need of financial dependence of the subsidiary on the parent Corporate or Group entities, has to be examined thoroughly and ultimately in the Lavasa Group insolvencies were consolidated for benefit of the creditors and leading to value maximization of the group stakeholders.

The Tribunal in the Videocon case also attempted to strike a balance between its duty to pool the assets and liabilities for the purposes of dealing with unsecured claims while keeping in view the rights of unsecured creditors. The resolution plan could be held “fair and equitable” where priority was given in respect of certain specific assets pledged in connection with loans granted by the secured creditors.

Repeatedly the courts have laid emphasis on the fact that the Tribunals are equity Courts and that the power arises from the court’s equity jurisdiction and therefore if there exists a possibility of unfair treatment, the demand of consolidation shall be questioned. 

Along with the development of jurisprudence internationally the courts have also went ahead to allow the Indian Resolution professional to coordinate with the Dutch administrator in Jet Airways (India) Ltd v State Bank of India & Anr through a cross-border insolvency protocol.

Conclusively, the Indian courts have attempted to strike a balance between the harm that could be caused to the creditors and the benefits of consolidation. A situation where the subsidiaries are interlinked and inherently dependent on the parent company, consolidation is deemed more equitable and fair and therefore is preferred by the courts. The entire issue of whether the assets are to be pooled together or not is decided on a case to case basis taking into consideration all the existing facts. In less than a decade of enactment of the Bankruptcy Code the amount of cases filed have grown exponentially and thereby making it necessary to amend and insert the provision of merger or demerger to conduct insolvency proceeding especially where the offices are allocated in jurisdiction of different NCLT’s and a concrete reforms are necessary to simplify the process.


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