Buried Together, Tried Separately: The Irony of India’s Group Insolvency Practice

The world is a place of business, partnerships, and insolvency. It has witnessed myriad cases of insolvency necessitating discourse on how to address insolvency, especially in large corporate groups. Various instances have cropped up not only in India but also in other prominent jurisdictions, further underscoring the urgency of the necessary discourse. Group insolvency is the process of resolving the financial distress of several interdependent companies in a corporate group, with awareness of their financial or operational interdependence, to treat their creditors fairly and efficiently allocate assets among the legally separate companies. With the collapse of the IL&FS Group, India’s insolvency regime for addressing group defaults came into question. Other notable instances, such as the Vedanta Resources case, have not only brought forth novel issues and opportunities but have also thrown up roadblocks to swift business resolution. Despite the systemic significance of the Insolvency and Bankruptcy Code, 2016, there exists a lacuna of legal and practical complications in resolving group insolvencies within its individualistic framework. The IBC has no framework to address group insolvency and follows to the letter the principle of corporate separateness in Section 3(7). This omission leads to a failure in coordinated proceedings, weakens the repayment to creditors, and does not reflect the commercial realities of interdependent conglomerate structures such as IL&FS. The insolvency regime in India is quite different from that of jurisdictions such as the US, where Chapter 11 enshrines the substantive consolidation doctrine, as well as the EU, which allows coordinated group proceedings. Substantive consolidation enables the merging of the assets and liabilities of members of a corporate group and, de facto, the treatment of all members as a single debtor. It is not recognised in Indian law, however, some tribunals have implicitly applied its reasoning, most famously in the IL&FS resolution, without any apparent normative or doctrinal basis. The paper critically evaluates the adoption of the doctrine of substantive consolidation in the Indian insolvency regime. The authors, through the study of best practices from other jurisdictions, and the legal status quo in India, present the roadblocks and challenges posed by group insolvency in India and put forth plausible solutions and reforms for overcoming these roadblocks, aimed at adopting a ‘qualified’ substantive consolidation tailored for Indian conditions. All in all, the article does not promote blind application of the doctrine, but calls for a sophisticated, situation-specific approach to group insolvency. Since there is a high concentration of conglomerate enterprises in India with opaque inter-company transactions, there is a risk that a failure to consider substantive consolidation would erode the efficiency and fairness of large-scale insolvency solutions. A calibrated model, based on due process and creditor consent, may be a revolutionary change in the insolvency regime in India.