Advantages of consolidation
Issues and challenges


The Insolvency and Bankruptcy Code 2016 was envisaged as a complete framework that would incorporate the best practices across all jurisdictions to govern all insolvency-related matters. However, the complexity of certain concepts has required a phased approach as regards their implementation. The need for such an approach for group insolvency was evident following the Insolvency Law Committee's observations in a 2018 report.

India's first encounter with group insolvency came through judicial intervention by the National Company Law Tribunal (NCLT) during the insolvency of the Videocon Group. Relying on US precedents, the NCLT ordered a substantive consolidation of the corporate insolvency resolution process (CIRP) of 13 intricately connected Videocon Group entities. Several group insolvencies have subsequently engaged in arguments on consolidation, sometimes successfully. They include:

  • Lavasa;
  • KSK Mahanadi; and
  • Adel Landmarks.

Global jurisprudence supports different frameworks to tackle the complexities of group insolvencies, ranging from procedural coordination (ie, a CIRP through a single insolvency professional and single administering court for administrative convenience) to substantive consolidation (ie, treatment of the group as a single economic entity, thereby negating the limited liability principle). The administering courts may often allow other hybrid measures within this broad spectrum.

Advantages of consolidation

There are inherent limitations to such an individualistic approach of CIRPs of grouped companies. Consolidation can easily be overcome to benefit all stakeholders with the objectives enshrined in the preamble of the Code. In an isolated approach:

  • asymmetry of information may cause a problem in the conduct of the CIRP;
  • interconnected operations and entangled business may confuse the investors concerning the allocation of resources within the group, which might discourage investment in the absence of any sustainable or independent business model;
  • there might be a waste of time and effort in identifying or understanding the dynamics of the related party transactions and, thereafter, in pursuing the inter-company or intra-group claims;
  • there would be extravagant process costs and duplication of effort for each entity, such as when piecing together information about common exposures and investments;
  • resolution professionals may look to maximise the value of the companies and face friction with respect to the continuance or termination of the often onerous related-party transactions and the claims or counterclaims in respect of inter se guarantees or cross-collateralisation; and
  • coordination in collecting information on avoidable transactions undertaken by insiders or promoters may be difficult and detrimental to the group creditors. Individual entities may have neither requisite information nor finances to pursue recovery from such transactions.

All these problems can easily be resolved through an appropriate framework for consolidation of group insolvencies. While the rationale for consolidation may mostly be cost advantages, in other cases, it may simply become necessary when separation of financial affairs of the entities is impossible.

Issues and challenges

The benefits of consolidation also present certain issues or challenges:

  • lack of lender homogeneity (ie, different loan profiles and security interests) creates tension in the resolution and distribution mechanism. In such cases, procedural consolidation is more desirable since it focuses on a coordinated CIRP without merging the group assets or liabilities;
  • mutually owed liabilities may form a reasonable part of the overall group debt, which is considered in the computation of the liquidation or fair value of each company. Given the conflicting interest of different lenders in such cases, the ordinary practice of ignoring related party debts may not be feasible;
  • the extent or scale of business in a diversified group may often require the appointment of other professionals to aid the functions of the resolution professional, which may add to process cost. However, such added costs would certainly be less than the cumulative costs of running the individual CIRPs; and
  • in cases of multinational conglomerates, there might be coordination problems with foreign representatives and taking custody or control of foreign assets would be difficult in the absence of a cross-border insolvency framework. In the Videocon case, the claims regarding guarantees that were given to the creditors of foreign subsidiaries were admitted; however, their assets could not be merged, which led to a heavy mismatch between the assets and liabilities of the group.

For further information on this topic please contact Anoop Rawat or Ahkam Khan at Shardul Amarchand Mangaldas & Co by telephone (+91 11 4159 0700) or email ([email protected] or [email protected]). The Shardul Amarchand Mangaldas & Co website can be accessed at

An earlier version of this article was first published in Asia Business Law Journal.