Richa Saraf


It is common business practice for group entities to regularly engage in related party transactions such as cross collateralisation, guarantee comforts, tunnelling or significant influence arrangements. While such structures largely respect the separate legal status of the group companies, practice suggests such inter-linkages in business, operations and management often raise significant challenges when any one or more entity in the group become insolvent[1]. In such cases, for maximisation of value to the stakeholders and to enhance the prospects of resolution, creditors may seek for substantive consolidation.

While the legal framework on group insolvency law is still a work in progress, in various cases, NCLT is taking cognizance of the corporate behaviour while adjudicating upon group insolvency matters. Recently, the Hon’ble National Company Law Tribunal Mumbai Bench, in the case of State Bank of India v. Videocon Industries Limited & Ors.[2] held that for the purpose of the corporate insolvency resolution process, the foreign oil and gas assets and properties, including any claim, interest therein, of Videocon Group held through the foreign subsidiaries of the Corporate Debtor will be regarded as the property of the Corporate Debtor.

Facts of the case:

Videocon Industries Limited (“VIL”) has been engaged in the business of telecommunications, consumer and electronic goods and oil and gas exploration. For the purpose, VIL established subsidiaries/step down subsidiaries (including overseas ones). The overseas oil and gas business was being taken care of by VOVL Ltd. (Indian), Videocon Hydrocarbon Holdings Ltd. (“VHHL”) and other step down subsidiaries (Overseas) which held participating interest (PIs) in oil and gas acreages.

VIL and VOVL also mobilised loans in VHHL, on the basis of SBLC facility availed by them as co-borrowers. While VIL was later released as a borrower, but a corporate guarantee was obtained from VIL.

On the basis that SBLC facilities were granted to VOVL and that VOVL has defaulted, the lenders were desirous of selling the PIs held by VOVL and the overseas companies. However, the Chairman of the Corporate Debtor filed an application before NCLT for determination of the following questions:

  • Whether the foreign oil and gas assets and properties, including any claim, interest therein, of Videocon Group held through the subsidiaries can be said to be the property of the Corporate Debtor?
  • Whether the provision of Section 14 of the Code would apply to the said foreign oil and gas assets and properties, including any claim, interest therein?

Group Insolvency Framework in India:

The NCLT, Mumbai Bench has, in its order[3] dated 08.08.2019, laid down certain parameters while ordering for consolidation of 13 Videocon group companies- (i) common control; (ii) common directors; (iii) common assets; (iv) common liabilities; (v) inter- dependence; (vi) interlacing of finance; (vii) pooling of resources; (viii) co-existence for survival; (ix) intricate link of subsidiaries; (x) intertwined accounts; (xi) inter-looping of debts; (xii) singleness of economics of units; (xiii) common financial creditors; (xiv) cross shareholding.

The Working Group on Group Insolvency, in its report dated 23.09.2019[4], has recommended that a ‘corporate group’ may include holding, subsidiary and associate companies, as defined under the Companies Act, 2013, however, an application may be made to the Adjudicating Authority to include companies that are so intrinsically linked as to form part of a ‘group’ in commercial understanding, but are not covered by the definition of corporate group above, as well. It was further stated that while procedural coordination mechanisms may be applicable only to those group companies which have defaulted, and which are covered by the Code for the purpose of insolvency resolution or liquidation, however, rules against perverse behaviour may be applicable to all group companies, regardless of their solvency.

The prevalence of corporate groups has thrown up special challenges which require modifications to the principle of treating companies within a group as completely separate entities[5]. In light of the aforesaid, it is pertinent to refer to precedents available across the globe.

Precedents Abroad:

Relying on In Re Raymond, 529 B.R. at 475[6] and Logistics Information Sys., Inc. v. Braunstein (In Re Logistics Information Sys., Inc.), 432 B.R. 1 (D. Mass. 2010)[7], In Re Cameron Const. & Roofing Co., Inc. 565 B.R. 1 (2016)[8], the US Bankruptcy Code allowed consolidation and observed as follows:

“Bankruptcy courts may substantively consolidate two or more related entities and thereby pool their assets. Substantive consolidation treats separate legal entities as if they were merged into a single survivor left with all the cumulative assets and liabilities. Genesis Health Ventures, Inc. v. Stapleton (In Re Genesis Health Ventures, Inc.), 402 F.3d 416, 423 (3d Cir. 2005)[9]…. Substantive consolidation of two or more debtors’ estates is widely accepted. See, e.g., In Re Owens Corning, 419 F.3d 195, 207 (3d Cir. 2005)[10]; In Re Bonham, 229 F.3d 750, 764 (9th Cir. 2000)[11]; Reider v. Fed. Deposit Ins. Co. (In Re Reider), 31 F.3d 1102, 1106-07 (11th Cir. 1994)[12]; Drabkin v. Midland-Ross Corp. (In Re Auto-Train Corp.), 810 F.2d 270, 276 (D.C. Cir. 1987)[13]. Substantive consolidation of a non-debtor with a debtor, as here, is less common, but increasingly accepted. The trend toward greater court approval of substantive consolidation has its genesis in the increased judicial recognition of the widespread use of interrelated corporate structures…. Eastgroup Props. [v. Southern Motel], 935 F.2d [245] at 249 [(1991)[14]] (quoting In Re Murray Indus., Inc., 119 B.R. 820, 828-29 (Bankr. M.D. Fla. 1990)[15]). Without the check of substantive consolidation, debtors could insulate money through transfers among inter-company shell corporations with impunity. In Re Bonham, 229 F.3d at 764[16].


Within this circuit, bankruptcy courts have approved the application of substantive consolidation to non-debtors, often in cases in which the non-debtor is a subsidiary or alter ego of the debtor. See, e.g., Gray v. O’Neill Props. Group, L.P. (In Re Dehon, Inc.), No. 02-41045, 2004 WL 2181669, at *3 (Bankr. D. Mass. Sept. 24, 2004) (Large corporations, such as the Debtor, often use multi-tiered corporate structures, and substantive consolidation has been used to reach the assets and liabilities of a non-debtor subsidiary corporation.); Murphy v. Stop & Go Shops, Inc. (In Re Stop & Go of Am., Inc.), 49 B.R. 743, 745 (Bankr. D. Mass. 1985).”

In Re S & G Financial Services 451 B.R. 573[17], the US Bankruptcy Court held that consistent with the directive of Sampsell, it is well within the equitable powers of a bankruptcy court to allow substantive consolidation of entities under appropriate circumstances, whether or not all of those entities are debtors in bankruptcy. It further held that a bankruptcy court has the jurisdiction over non-debtor entities to determine the propriety of an action for substantive consolidation insofar as the outcome of such proceeding could have an impact on the bankruptcy case.

In Re Permian Producers Drilling, Inc., 263 B.R. 510 (D. Tex. 2000)[18], the US District Court for the Western District of Texas observed as follows:

“The absence of any statutorily prescribed standard has meant that the responsibility for developing standards for determining whether substantive consolidation should be granted has been left largely to the courts. The courts, however, have not developed a universally accepted standard for substantive consolidation. Bonham, 229 F.3d at 765-66[19]; 2 COLLIER ON BANKRUPTCY ¶ 105.09[2]. Rather, whether the circumstances warrant substantive consolidation is a highly fact specific analysis that must be made on case-by-case basis. Bonham, 229 F.3d at 765-66.

Under the more traditional test the elements test the existence of a combination of elements showing a strong relationship among the debtors is a prerequisite for substantive consolidation. The substantial relationship must also be coupled with additional elements such as commingling of separate assets and liability so as to make it prohibitively expensive or difficult to sort out the proper assignment and ownership of the assets and liabilities. The elements most commonly cited by courts under this test are:

(1) the degree of difficulty in segregating and ascertaining individual assets and liability;

(2) the presence or absence of consolidated financial statements;

(3) the profitability of consolidation at a single physical location;

(4) the commingling of assets and business functions;

(5) the unity of interests and ownership between the various corporate entities;

(6) the existence of parent and inter-corporate guarantees on loans; and

(7) the transfer of assets without formal observance of corporate formalities.”

 In Re Hemingway Transp., Inc. 954 F.2d 1 (1st Cir. 1992)[20], the US Court of Appeals observed that consolidation is permitted only if it is first established that the related debtors’ assets and liabilities are so intertwined that it would be impossible, or financially prohibitive, to disentangle their affairs[21]. Further, the court held that the trustee may request consolidation to conserve for creditors the monies which otherwise would be expended in prolonged efforts to disentangle the related debtors’ affairs[22], however, while considering the application for consolidation, the bankruptcy court must balance the potential benefits of consolidation against any potential harm to interested parties. [See Also: In Re Steury, 94 B.R. 553, 554-55 (Bankr.N.D. Ill. 1988); In Re Amereco Envtl. Services, Inc., 125 B.R. 566, 568 (Bankr.W.D. Mo. 1991)[23]; In Re Helms, 48 B.R. 714, 717 (Bankr.D. Conn. 1985)[24]; In Re Ford, 54 B.R. 145, 148 n. 6 (Bankr.W.D. Mo. 1984)[25]]

In Re Snider Bros., Inc., 18 B.R. 230 (Bankr. D. Mass. 1982)[26], relying on the cases In Re Food Fair, Inc., 10 B.R. 123, 124 (Bkrtcy.S. D.N.Y.1981) and In Re Vecco Construction Industries, Inc., 4 B.R. 407, 6 B.C.D. 461, 1 C.B.C.2d 216 (Bkrtcy.E.D.Va.1980)[27], the US Bankruptcy Court observed that the only real criterion is the economic prejudice of continued debtor separateness versus the economic prejudice of consolidation. While holding that there is no one set of elements which, if established, will mandate consolidation in every instance, the court observed that the fact that corporate formalities may have been ignored, or that different debtors are associated in business in some way, does not by itself lead inevitably to the conclusion that it would be equitable to merge otherwise separate estates.


The following points are relevant while considering consolidation:

(a) One question that may arise here is who can apply for consolidation? Whether the corporate debtor or creditors may request for consolidation or whether reference has to be made only by the insolvency professional?

While the application in the case of Videocon was made by the Chairman of the Corporate Debtor (to reduce his exposure as a personal guarantor), in our view, the application for consolidation should be made for the general benefit of the creditors and not to safeguard the personal interest of the guarantors of the Corporate Debtor. This does not imply that merely because third parties like guarantors will be in an advantageous position, NCLT will not consider consolidation. However, it is recommended that the application is filed by the insolvency professional for maximisation of value to the stakeholders of the Corporate Debtor, and the NCLT considers the application based on the larger interest of all the stakeholders, and not for any particular set of creditors.

(b) Again, the next question may be whether NCLT may order for consolidation of a debtor with a non- debtor?

In the case of Videocon, the NCLT has allowed consolidation of solvent and insolvent companies. In fact, on analysis of the precedents cited above also, it is clear that the courts may order for consolidation of a debtor entity with a non- debtor or solvent entity, however, consolidation will not be a general principle, and will depend on the facts and circumstances of each case.

(c) Further, in cases where the consolidation involves foreign companies, whether the courts can overlook the foreign insolvency laws and other relevant laws such as local property laws?

In the case of Videocon, while the NCLT ordered for consolidation of assets of Indian companies and foreign companies based on certain parameters, the NCLT should have also regarded the foreign laws where the foreign companies are operating and/ or are incorporated, more specifically, the insolvency regime of the country where the foreign companies are incorporated and the local property laws therein. Also, until the advent of the cross border insolvency framework, enforcing the provisions of IBC outside India may be a huge challenge.

Our write-ups/ presentation on related topics can be accessed from the link below:

  1. Entity versus Enterprise: Dealing with Insolvency of Corporate Groups;
  2. Group Insolvency: Moving from “Entity” to “Enterprise”;
  3. Proposed Group Insolvency Framework in India.






[5] Ibid
















[21] See Also: In Re Augie/Restivo Baking Co., 860 F.2d 515, 519 (2d Cir. 1988); In Re R.H.N. Realty Corp., 84 B.R. 356, 358 (Bankr.S.D.N.Y. 1988); In Re Blum, 49 B.R. 422, 427 n. 1 (Bankr.W.D. Mo. 1985)

[22] See Also: In Re Evans Temple Church of God in Christ & Community Ctr., Inc., 55 B.R. 976, 981 (Bankr.N.D. Ohio 1986)






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