Corporate Cohesion, Legal Division: The Need for India’s Codified Group Insolvency

Shanaya Singh*

Introduction

The insolvency resolution process of the Videocon Group marked a landmark instance in the evolution of India’s insolvency jurisprudence, specifically in the context of group insolvency. In a unique and rare setup, the complex case involves multiple corporate debtors. Being one of the landmark cases under the Insolvency and Bankruptcy Code, 2016 (“IBC”), this case involved a chain of 13 corporate debtors with immensely intertwined financial and operational structures. The data indicates that only Rs 2,962.02 crore, or 4.15 per cent of the entire amount of unpaid claims, is allowed “under the plan.” In contrast, claims admitted total Rs 64,838.63 crore out of the total claim amount of Rs 71,433.75 crore, and the total haircut to all creditors was 95.85%. The National Company Law Tribunal (“NCLT”) took an unprecedented step towards consolidating insolvency proceedings within the IBC. This blog post explores how the case of SBI v. Videocon Industries Ltd (“Videocon”), in which the NCLT consolidated 13 out of 15 group companies using a structured, two-stage test, sparked a renewed interest in refining India’s insolvency framework for corporate groups.

Videocon Group Insolvency: A Brief Overview

Videocon Group, a diversified industry with more than 15 corporate entities, has a long history of massive ‘financial distress’, leading to several lawsuits. On 6th July 2018,  an association of financial creditors led by the State Bank of India moved a petition under Section 7, IBC to the NCLT in 2016 before the Mumbai Bench, urging the substantial consolidation of the Videocon group of 15  to form a “common debtor”. The reason for moving the application was that a separate Corporate Insolvency Resolution Process (“CIRP”) was initiated against each of the companies, which failed to attract bids due to their complicated interdependence and inability to pay off, as they lacked a unique identity or value. This judgment elucidates the concept of substantial consolidation, a process that primarily unfolded from the US bankruptcy regime. The doctrine majorly allows the adjudicating body to combine all the assets and liabilities of all such independent and separate entities into a single match, thereby subjecting them to a unique CIRP. The NCLT held that such consolidation is necessary to preserve asset value, avoid duplication of effort, and fulfil the IBC’s objective of maximising value and achieving a timely resolution.

Crucially, this was the first major case in India where group insolvency got judicial recognition despite the absence of explicit statutory provisions. It also took into consideration important criteria such as common control, interlinked operations, shared assets and liabilities, along with common creditors to justify consolidation, and set a precedent for future cases involving corporate groups. The case has set a proactive as well as practical approach by Indian tribunals to align with the best practices in global insolvency and address the realities of large commercial business industries.

Test for Consolidation: How Courts Determine the Consolidation of Group Insolvency

The doctrine of substantial consolidation originated as one of the judicially developed concepts in U.S. bankruptcy law. It allows courts to consolidate or combine the assets and liabilities of two or more related, although legally separated, entities into a shared pool, treating them as one for the purpose of the resolution process. The fundamental purpose behind it is to promote efficiency in resolution proceedings where the boundaries between entities are so blurred that separating them would be counterproductive. This doctrine got its significance in India from the case of Videocon, which involved multiple corporate debtors defaulting across a chain of financial obligations. Following multiple defaults and the invocation of bank guarantees, a consortium of 18 banks led by SBI filed petitions to the NCLT Mumbai seeking the consolidation of the insolvency proceedings.

Faced with this, the NCLT, Mumbai, adopted a two-stage test, taking inspiration from U.S. precedents like Food Fair Inc., Auto‑Train, and Augie/Restivo. Firstly, in a prima facie enquiry, the Tribunal emphasised the so-called existence of 14 elementary governing matters, including common control, common assets, common liabilities, interdependence, interlacing of finance, pooling of resources, co-existence for survival and intricate link of subsidiaries. Secondly, further categorisation based on the governing factor was considered necessary. Entities that would collapse or even lose significant value if separated were included in Category I (eligible for consolidation), while those capable of attracting viable resolution bids independently fell into Category II. Applying this approach, the NCLT consolidated 13 out of the 15 Videocon companies and excluded two, “KAIL and Trend Electronics”, because ‘they retained operational and financial independence’.

The Tribunal emphasised that this doctrine is an “exception and not the rule”, thus needed only when consolidation demonstrably benefits the broader creditor community. It explicitly recognised that certain creditors, especially those who extended credit to individual entities, might be disadvantaged if consolidation were applied too broadly. Hence, a meticulous, multifaceted balancing action was essential before invoking corporate unification. In sum, the Videocon case illustrates how Indian insolvency law, drawing on the U.S. equitable standard, now takes a structured and case-by-case approach to the instances of group consolidations.

Legal and Policy Vacuum: Limitations of the IBC

The IBC  has emerged as a robust framework for the time-bound resolution of distressed assets in India. However, when it comes to group insolvency, it remains structurally deficient. The IBC has been solely made for individual corporate persons, primarily based on the principle of separate legal personality, without any express provision related to handling conglomerates whose financial and operational frameworks are complexly knotted. As explained with the help of the landmark case of Videocon, the doctrine of substantial consolidation was adopted by the Mumbai Bench of NCLT in the absence of any statutory mechanism. The Court consolidated interlinked Videocon entities, claiming common control, shared assets, intertwined finances, and non-arms-length transactions. However necessary the step was, it invoked concerns regarding lacunae in the protection of creditors and transparency, as well as predictability in the resolution processes.

Moving forward, the current gap in the IBC requires much more than just the insertion of provisions. Though the doctrine of consolidation maximised the efficiency of the procedure, this move itself consisted of significant legal, doctrinal, and equity-based challenges. While the case of Salomon v. Salomon & Co. Ltd firmly highlighted the company’s separate legal personality and limited liability for its shareholders, it did not shape or hint at the doctrine of substantial consolidation. That doctrine, by contrast, deliberately sets aside corporate separateness but only in limited circumstances to deal with complex insolvencies. The Salomon case lays down the “default rule” that each corporate entity stands alone; substantial consolidation acts only as a carefully circumscribed exception when multiple entities are so intertwined that treating them separately would destroy value. Courts have developed substantial consolidation as a pragmatic tool in insolvency, particularly when separate legal structures mask shared control, pooled resources, or cross-guarantees. It is not a doctrinal extension of the Salomon case but a response to real-world situations where artificial fragmentation of entities can disrupt creditor recovery and fair resolution.

At this point, a more nuanced approach is essentially needed in the IBC, because the two-step test can result in the segregation of better-performing entities and burden the weaker ones, hence defeating the objective of maximising the share value. The approach to deal with the pertaining issue should be to ensure independence of financial accounts over mere business autonomy and see whether consolidation, despite apparent independence, yields a better outcome for the stakeholders overall. The IBC needs to be codified in regard to group insolvency with better eligibility criteria for the consolidation of groups, protection for the creditors, and other procedural safeguards, taking inspiration from the UNCITRAL Model Law on Enterprise Group Insolvency, which plays a very crucial role.

Conclusion: Building Forward After the Dominoes Fell

The IBC is at a very nascent stage in the Indian legal system, which is why the discourse should focus more on finding whether consolidation will bring more benefits compared to losses if not consolidated. As the analysis above has proven, the application of substantial consolidation in its current form risks the core principles of corporate governance, such as separate legal personality as well as limited liability.  What appears now to be a technical tool for procedural efficiency can, if applied improperly and arbitrarily, result in severe financial distortions, thus disenfranchising creditors, altering commercial expectations, and simultaneously reducing the attractiveness of Indian insolvency processes for global investors. To maintain the integrity of the insolvency process and uphold India's reputation as a reliable investment destination, it is essential to establish a well-defined legal framework for substantive consolidation. Such a framework must delineate clear criteria and safeguards, ensuring that the consolidation process remains transparent, equitable, and respects the foundational principles of corporate law. By doing so, Indian law will be able to balance the need for procedural efficiency with the imperative of protecting stakeholder rights and maintaining investor confidence.

*The author is a Third-year B.A., LL.B. (Hons.) student at Gujarat National Law University, Gandhinagar.