INTRODUTION
The corporate environment in India is undergoing a radical shift, and can be well seen in the sudden escalation of corporate entities operating as subsidiaries or within a group structure. The corporate insolvency has transformed in developing countries such as India, with a growth of corporate groups comprising subsidiaries and parent companies that have been interlinked in their operational and financial aspects. The essential belief of corporate law is the notion of corporate separateness, where a business is understood to be distinct from its directors and its shareholders. This is supported by the corporate veil doctrine that protects the personal assets against the liabilities of the company that one is running. The increasing usage of this group organisation has brought in concerns relating to the possibilities of abusing the legal distinction, particularly in bankruptcy cases where it can be employed strategically to avoid liability and condemn the claims against it by creditors.
The belief of separateness is not a side note, it is imperative for the company law. A company that comes into existence finds itself in a separate legal status to its directors, shareholders, or affiliates, as held by the House of Lords in the historic case of Salomon v. Salomon & Co. This was not just a formalisation but constituted emancipation of the modern economy by enabling free circulation of capital and the business risk-impervious protection of privately owned assets.
Corporate group insolvencies in India have been challenging to deal with due to their complexities, which have hindered the use of the insolvency framework stipulated in the Insolvency and Bankruptcy Code of 2016 (hereinafter, “IBC”). The rigid form of legal formalism was no more a thing. NCLT in the case of Videocon Industries Ltd, where it construed that there are multiple businesses as one economic entity. There is still no unified legislation to address group insolvency, and as such, these solutions remain atomized. This loophole destroys the intention of the Code that stabilized efficient and fair solutions because promoters can exploit the corporate system and conceal economic relationships to escape responsibility.
Consequently, the following paper will investigate whether the notion of corporate separateness, that is shielded by the concept of corporate veil, is being misused in the circumstances of group insolvency. It makes comparisons of cross-border initiatives like the UNCITRAL Model Law and the 2019 Directive issued in the EU, and examines Indian law to determine whether it gives courts the tools necessary to pierce the veil over such situations. The goal is to provide the justification for having a more sensible legal solution to the problem of convergence of economic substance and legal form, and eliminating the use of the veil as an excuse not to be held accountable in the face of insolvency.
BEYOND LEGAL FICTION: GROUP INSOLVENCY AND THE LIMITS OF CORPORATE SEPARATENESS
The concept of Corporate Separateness Doctrine was formulated in Salomon v A Salomon and Co Ltd. The case presupposes that all incorporated entities are juridical persons and that they are independent and separate from their shareholders and members. Such legal fiction, as far as it is essential to the corporate architecture, has its doctrinal and operational shortcomings in the context of the group insolvency, particularly aimed at the corporate ecosystem developing in India. In circumstances in which businesses that are, in legal terms, legally dissimilar are intertwined in operation and delicately dependent in monetary terms, the rebuttable presumption of separateness is no longer an endorsement of business reality.
The Indian corporate world of loosely knit, frequently family-owned and run conglomerates shows patterns of cross-shareholdings, common control, as well as inter-firm dependencies that occur repeatedly. In these cases, courts should be particularly averse to piercing the veil since the result creates a high risk of opportunism: that is, asset stripping through inter-group transfers, non-fulfilment of resolution duties, and creditor-oppression. Upon the interpretation of this, NCLT in SBI v. Videocon Industries Ltd. applied the doctrine of substantive consolidation by bringing thirteen parties that can be deemed as a single economic entity based on their common governance, pooling of their assets, and financial mingling. These kinds of conclusions make a shift in jurisprudence towards substance. This was made even more effective by the subsequent decisions, which has reinforced the development of this approach by emphasising the controlling mind criterion and the focus of the importance of public interest in analysing veil-piercing.
The above-stated decisions, all of which are co-authored by the 2021 CBIRC-II (hereinafter, “CBIRC-II Report”), and the 2019 Working Group reports, support the idea that corporate separateness may be sacrosanct, but is not. In the absence of legislative codification, a fact-intensive and equity-based perspective must be employed, especially in cases of corporate abuse where the corporate form is used as a means of evading risk rather than facilitating enterprise. Therefore, the doctrine must yield in cases where its enforcement would impede the objectives of insolvency resolution.
FROM ENTITY LAW TO ENTERPRISE REALITY: SHIFTING AXES IN INSOLVENCY JURISPRUDENCE
Corporate law traditionally rests on the sanctity of the individual entity. It presumes discrete legal subjects, distinct obligations, and asset partitions. However, insolvency law has to address a situation that presents an increasing challenge: the reality of businesses not existing as siloed companies, but as functional businesses aggregated over a variety of different legal entities. This causes a conflict in jurisprudence, IBC proceedings require an economic solution, and company law does not accommodate it. The Indian insolvency jurisprudence, especially since Videocon case, is demonstrating that it is willing to cleave to entity-centric reasoning. Beyond a certain unspoken shift that, in some situations, enterprise structure should prevail over legal form can be seen in such doctrines as substantive consolidation or single economic unit. However, these principles have been considered foreign to the Indian company law, which has not relented in the rule of separate personality. Such dissonance raises a grave legal problem: Is it possible to operate the insolvency resolution on such a different axis as general company law? When tribunals are used to resolve distress to the detriment of separateness, then that separateness is used to organize corporate governance, liability, and rights at large, and the legal system creates inconsistent results.
Thus, there is a functional bifurcation going on: a segregation of corporate separateness that persists outside of insolvency, and the introduction of a new logic, which is the logic of enterprise accountability, that is unfolding within insolvency. The dualism is not simply theoretical in nature about the duties of directors, inter-company guarantees, and resolution plan design. Indian law should not attempt to expand veil-piercing as an exception to the rule, but make it clear whether there is another set of structural presumptions that apply in the case of insolvency. The future of group resolution does not depend on the deranging of doctrine, it depends on recognising that insolvency law is developing its own internal coherence, founded on accounts of how businesses operate, rather than how they are organised.
TOWARDS A SUBSTANCE-DRIVEN FRAMEWORK FOR GROUP INSOLVENCY
India presently does not have a statutory framework under the IBC that could deal with group insolvency. Although tribunals have taken pragmatic stands in cases as Videocon, which is itself experiment without any legislative support. The Report of the Working Group of the IBBI (2019), although the prospective has remained unimplemented, there is a vacuum that leads to inconsistency and litigation.
This loophole allows givers to take advantage of the principle of corporate separateness by favourably positioning property and evading debts. Creditors have to endure long delays in recoveries or receive less money than before, and the process of resolving the matter becomes compromised. There is an immediate need to codify principles such as substantive consolidation and group coordination, facilitate joint CIRP filings, and facilitate clear rules, which include common control, interdependence, and cross guarantees, in distinguishing integrated enterprises.
In theory, the group insolvency does not have to water down the idea of corporate personality. Rather, it proposes the recognition of the economic reality of enterprise groups as an example of inappropriate use of legal form meant to frustrate the rights of creditors. The corporate veil, which is initially an initiative designed to protect against taking risks and making investments, cannot turn into an instrument of escaping liability.
Since the IBC is a welfare-based legislative instrument that seeks to maximize value and establish fairness, courts and law-creation entities need to formulate an insolvency-oriented logic, one that would subscribe to the reality of enterprises rather than a pure legal formalism. A logical system of group insolvency will be in line with the international standards and harden the insolvency jurisprudence, particularly based on Indian soil, to corporate exploitation.
CONCLUSION
The corporate separateness is a core theme of the company law, and it may not be used, through insolvency of the group, as a defence strategy. Insolvency law needs to be updated to accommodate the current business reality because Indian businesses are increasingly running on the basis of complex group structures. The need to have a coherent legal framework comes out clearly because the nature of the ad hoc responses that are being made by the tribunals is pragmatic.
India should have an organized and principle-based solution of group insolvency with references to the international models such as the UNCITRAL Model Law and the EU Directive. This will mean that one has to go beyond legal formalism and consider the modern enterprises as being interconnected.
Most importantly, this is not about abolishing corporate law- it is about doing justice to insolvency jurisprudence and bringing it into the mainstream of economic relations. Legal clarity is also needed to make tribunals powerful, allow creditors to be adequately safeguarded, as well as provide a fair, efficient, and unmanipulable mechanism for resolving the issue. Indian insolvency law needs future consideration of the integrity of legal form and enterprise reality. We should now change our isolated experimentation to codification, a coherent regime.
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Author: Shalin Kumar | 5th Year, 10th Semester, B.A. LL.B. (Hons.) | Chanakya National Law University, Patna
Co-author: Aman Raj | 3rd Year, 6th Semester, B.A. LL.B. (Hons.) | Chanakya National Law University, Patna
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