Today’s business trend as it is, companies these days readily establish a subsidiary or associate company, the purpose of which varies from commercial gains to supplementing sister concerns. Consequently, these group companies become so interrelated that it is very difficult to find out single thread from the wool to the extent that the assets and liabilities of one company are also that of the other of its companies. The intricacy of the matter is not a concern, until, among other things, these group companies are declared insolvent. Now, the legal procedure for the insolvency matters begins with the Corporate Insolvency Resolution Process (“CIRP”) under the Insolvency and Bankruptcy Code (“Code”). During the CIRP, if we are to ascertain the assets and liabilities of each of the fragments of these group companies one by one, then, we lose the cost and time efficiency of the process. And a legally viable solution to this issue is absent from The Code.

The ideal way forward is to look around globally and find a doctrine that can solve this newly emerging issue and make it in tune with the Code. That is what the National Company Law Tribunal has done in SBI v. Videocon Industries Ltd which was later appreciated by NCLAT in the case of Radico Khaitan Ltd. v. BT & FC Pvt. Ltd. &Ors.

The doctrine of Substantial Consolidation

The edifice of corporate law is based on the concepts of –

a. A separate legal entity established;

b. Limited liability

The doctrine of Substantial Consolidation is primarily in tune with these two concepts and is an extension of the concept of “Piercing the Corporate Veil”. This doctrine of Substantial Consolidation is a horizontal merger with the parent company and goes one step further by not only benefiting one creditor (as by piercing the corporate veil) but also ensuring equitable distribution to all of the creditors.

The doctrine has been well-established by US and UK courts. In the US, the genesis of the doctrine is owed to cases under Section 101 of the US Bankruptcy Code. Even in the US Code, no specific provision is present for such consolidation, yet as the hour demanded, the courts have derived authority from broadly worded section 105 of their code. Precedents like Auto Train Corpn. Inc. v. Midland-Ross Corp and Augie/Restivo Baking Co. Ltd., In Re help the court to identify places where the doctrine has to be applied.

Simply put, the doctrine of substantial consolidation means pooling of assets and liabilities of such group corporate entities that cannot be practically distinguished at the touchstone of its working and ownership.

Not only the assets of the company reach their maximum as it leads to the end of inter-corporate claims, repetition of creditors’ claims, etc. but also the cross-debts are wished away. Moreover, a consolidated resolution plan is better and more luring than a resolution plan that stands alone. Nobody can deny the ease of gathering information from this system as everything is served on one platter- the information about assets, obligations, etc. What is left at the end of it is a broad panoramic of the group and the best purchase option out there!

Indian Jurisprudence with regard to Consolidation

The lacuna in Indian jurisprudence was felt when CIRP had to be initiated but there was no provision for group insolvency to do so. The need was to bring all the subsidiaries and associate companies to face a common adjudicatory authority wherein assets and liabilities would be taken into account after clubbing. Indian jurisprudence felt a need for consolidation of CIRP of all the group companies. Another important issue is that in the Code, there exists no provision for fair value as a going concern for the industries that are insolvent in consonance to the interests of the creditors they have. This issue accentuates even more for group companies because, in the end, their recovery is negligible.

To rule out all these issues from the Indian legal system, the judiciary introduced the doctrine of Substantial Consolidation; which is backed by the Report of the Insolvency Law Committee, 2018.

Substantive Consolidation in light of Videocon Industries Ltd case

The present case is the foremost landmark authority in India regarding CIRP consolidation. Accepting that the Code does not provide for such consolidation, the National Company Law Tribunal (NCLT), Mumbai based its power to do so by relying on the judgment of Re Vecco Construction Industries that held that courts have the power to rule for consolidation by exercising their equitable powers.

To understand the judgement better, we need to dig a bit into the factual matrix of the case. A petition was moved by a consortium of banks steered by SBI (all as common creditors) in the Mumbai bench of NCLT. The petition requested for substantial consolidation of 15 companies under the common lead as “Videocon Group” (all as common debtors). The main ground being that the companies are so intermixed and interdependent that they have no separate value or identity. Their financial statements, their loan guarantees, etc. everything was interlinked.

While analysing the case, the bench perused various US and UK rulings like that of Food Fair Inc., In re and the matter got decided in favour of the petitioners as 13 of 15 companies got grouped. The bench also laid down two determining tests for group consolidation-

Test for Consolidation-

1. A prima facie existence of elementary governing factors, and

2. Categorization based on the governing factors.

In the first test, the bench laid down 14 factors that had to be verified before the grouping companies. These factors included common control, common assets and liabilities, common directors, interdependence, the interlacing of finance, complexly linked subsidiaries, interloping debts, mutual existence for survival, etc.

In the second test, categorization was needed on the above-stated factors. Under this, two categories were created-

  1. Category one- included companies that were so interlinked that separating them would mean little/no maximization of value of the assets.
  2. Category two- included companies whose inter-linkage was such that even after separating them, they would be able to invite profitable and viable restructuring proposals.

The yardsticks laid down, in this case, have been followed in all the succeeding cases. Primarily, consolidation of CIRP has been done by NCLT, Mumbai in Axis Bank Limited and Ors. v. Lavasa Corporation Limited and Ors and Edelweiss Asset Reconstruction Company Ltd. v. Sachet Infrastructure Ltd. and Ors.

Further in RadicoKhaitan Ltd. v. BT & FC Pvt. Ltd. & Ors. the doctrine of substantial consolidation has been applied. The decision was rendered by NCLAT after taking into account whether the case fulfils the parameters as said by the NCLT, Mumbai in the Videocon Industries Case. It held that there was common control, common directors, common assets, common liabilities, interdependence, pooling of resources, intricate links and common financial creditors.

Even a prior doubted situation was clarified as it was held that an Operational Creditor has a locus standi to file an application for consolidated CIRP. This case is the prime example that the code is now moving forward from its nascent stage and the doctrine has been well imbibed in its foundation.


Having gone through different facets of the doctrine, it can be stated that the doctrine will make the CIRP process swift and lucrative for the group companies.

The better part is that now the adjudicating authorities will also be able to pierce the corporate veil to hold these hotshot group companies answerable for the operations of its sub-set companies. What cannot be forgotten n is that till the Code is not amended to bring provisions relating to Substantial Consolidation of group companies, NCLT is incapacitated to pass an order for such consolidation. But procedural coordination can be done under Rule 11 leaving untouched the assets and liabilities of each separate company which would ultimately serve to protect the rights of all the creditors.

(Article is written jointly by Shubham Mathur and Chakshu Purohit)

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May 2021