IBBI’s discussion paper: The Case for a Legislative Framework for Group Insolvency

The Insolvency and Bankruptcy Board of India’s (IBBI) recent discussion paper of 4-2-2025 on “Streamlining Processes under the Code: Reforms for Enhanced Efficiency and Outcomes” demonstrates a commitment to address operational challenges in the insolvency resolution process.¹

It touches upon several important issues in making the Insolvency and Bankruptcy Code, 2016 (IBC)² more robust, viz:

(1) Review of expenditure on goods and services availed during corporate insolvency resolution process (CIRP).

(2) Coordinated insolvency resolution for interconnected entities.

(3) Presentation of all resolution plans before the Committee of Creditors (CoC).

(4) Mandatory submission of statement of affairs by corporate debtors.

(5) Reliefs and concessions subsequent to approval of resolution plan.

(6) Incentivising interim finance providers.

(7) Disclosure and treatment of avoidance transactions.

(8) Request for resolution plans for part-wise resolution of corporate debtor.

(9) Empowering CoC for expedited implementation of resolution plans.

(10) Non-receipt of repayment plan under insolvency resolution of personal guarantor.

(11) Sale of corporate debtor as a going concern.

While most proposed changes can be effectively implemented through regulatory amendments, the framework for coordinated resolution of interconnected entities of a group requires a more comprehensive treatment through amendments to the IBC itself.

Coordinated insolvency resolution for interconnected entities

The discussion paper at Para 2, has identified need for “coordinated insolvency resolution for interconnected entities”.³ It acknowledges the fact that the CIRP in India faces challenges when dealing with complex corporate structures that have interconnected operations and finances. The existing approach treats each entity separately, overlooks the interdependencies in modern business ecosystems, potentially reducing the collective value of connected firms and complicating the resolution process.

The lack of legal mechanism for coordinating CIRPs across interconnected entities leads to inefficiencies, higher costs, and potential conflicts. This is particularly problematic when multiple related entities undergo CIRP simultaneously, generally as a chain effect, without a structured method to leverage their interconnections.

The current framework misses opportunities to capitalise on synergies and mutual dependencies within corporate groups, resulting in suboptimal outcomes. Stakeholders face uncertainty due to the absence of clear guidelines for coordinated resolution strategies, which can discourage comprehensive resolution plans that could yield better outcomes for all parties.

While recent court cases like SBI v. Videocon Industries Ltd.⁴ and SREI Infrastructure Finance Ltd. v. IDBI Bank Ltd.⁵ have acknowledged the need for a more nuanced approach to group insolvencies, the regulatory framework has not yet evolved to provide a standardised, efficient process for such scenarios.⁶

It is heartening that the IBBI attempts to address this serious challenge to make the IBC more efficient and addresses market concerns. It recognises that a more coordinated approach could significantly enhance the efficiency, effectiveness, and value realisation in resolving interconnected entities.

While the objective is noble, these issues cannot be effectively addressed by amending Regulations, without first modifying the statute, IBC.

Other judicial precedent

On 15-10-2018 the National Company Law Appellate Tribunal (NCLAT) passed an interim order declaring moratorium on all the 348 companies of the Infrastructure Leasing & Financial Services Limited Group (IL&FS),⁷ in consideration of the nature of the case, and public and economic interest. However, the order did not differentiate between different group entities on the basis of their ability to meet their obligations and continue trading.

In a subsequent order dated 11-2-2019⁸ the NCLAT lifted the moratorium on offshore companies and 22 other entities falling under the group which could service their debt obligations. 70 entities were also classified into groups of Green, Amber and Red on the basis of their ability to discharge their payment obligations. 22 entities which were classified as “Green”, were those companies, which could service their debt obligations, while 10 firms under “Amber” group could partly meet their obligations and 38 “Red” entities were those which could not meet any payment obligations.⁹

This broader judicial interpretation allows for a more flexible approach to group insolvency, recognising that modern corporate structures may involve complex interdependencies beyond traditional holding-subsidiary relationships.

Additionally, Singapore High Court’s seminal ruling IM Skaugen SE, In re and other matters,¹⁰ canvasses need to expand the scope of related companies that may be eligible for moratorium relief. The Court recognised the importance of “making available moratorium relief to related companies of the applicant — subsidiaries, holding company or ultimate holding company — if those companies play a necessary and integral role in the compromise of the applicant”.¹¹ This principle can be extended to include other related entities that are integral to the restructuring process, even if they are not directly in a parent-subsidiary relationship.¹²

Need for legislative framework by amending IBC

(1) The judicial precedent stated above buttress need for suitable the amendment to IBC to provide discretion to the adjudicating authority to grant moratorium relief to any related entity that demonstrates a substantial connection and integral role in the restructuring process, subject to the specific circumstances of each case.

(2) Jurisdictional issues

Different Benches of the National Company Law Tribunal (NCLT) may have jurisdiction over different group entities under current IBC provisions. Enabling consolidation or coordination of proceedings requires amendment to jurisdictional provisions in the IBC to:

(a) Allow Single Bench jurisdiction over group proceedings.

(b) Provide for transfer of related proceedings.

(c) Enable joint hearings across jurisdictions.

(3) Timeline management

The current 330-day timeline under Section 12¹³ of the IBC needs modification to accommodate group proceedings. The IBC should provide:

(a) Flexibility in timelines for group resolutions.

(b) Power to synchronise different CIRPs.

(c) Extension provisions specific to group proceedings.

(4) Statutory recognition to group entities/interconnected entities

The concept of insolvency resolution of interconnected entities in a group requires statutory recognition in the primary legislation of the IBC. While IBBI can regulate procedural aspects, fundamental concepts like “group”, “interconnected entities”, and “control” need definitive legislative backing. This is particularly important given that these concepts affect substantive rights of stakeholders. The clarity in statute makes it predictable as to which entities are “interconnected entities” of a group, say holding company (ultimate and/or immediate) and subsidiary with step-down subsidiaries, impact of bringing one or more interconnected entities into CIRP on the other group entities, etc. There is a need for operational flexibility like it may not be necessary to have all interconnected entities of a group to undergo CIRP. Keeping this flexibility at legislative level, can assist in developing the group insolvency resolution framework through regulations.

(5) Substantive consolidation

The power to order substantive consolidation of group entities (mixing of assets and liabilities) requires explicit legislative authority that cannot be created through regulations alone. The IBC may specify:

(a) Criteria for ordering consolidation (considering impact of say comfort letters, guarantees, besides financial transactions, pool of creditors and customers — like in case of real estate, airlines, non-banking financial companies (NBFCs), and insurance entities.

(b) Rights of creditors in consolidated proceedings.

(c) Some aspects in specific sector companies of a group may require guidance/regulatory framework prescribed by sectoral regulators, say RBI, and Insurance Regulatory and Development Authority (IRDA).

(d) Treatment of inter-company claims.

(e) Protection of dissenting stakeholders.

(6) Expanded scope of review of avoidance transactions

While the fundamental principles of identifying preferential, undervalued, extortionate credit and fraudulent transactions remain the same, group insolvency scenarios require a more sophisticated, coordinated, and holistic approach. This approach should leverage specialised expertise, advanced technological tools, and a deep understanding of group dynamics to effectively uncover and address avoidance transactions within complex corporate structures.

In group insolvency scenarios, the scope of review of avoidance transaction needs to be viewed from a different lens (a different approach and mindset):

(a) Transactions between group entities must be scrutinised more closely, as they may not be at arm’s length.

(b) The review should cover a wider network of related parties, including subsidiaries, holding companies, and associate companies.

(c) The economic substance of transactions, rather than just their legal form, must be considered to uncover any attempts to mask preferential or fraudulent dealings.

(d) Transactions that may appear preferential or undervalued when viewed in isolation might be justified when considered in the context of the group’s overall business strategy.

(e) The potential for cross-guarantees and other forms of financial support between group entities must be carefully examined.

(f) Consolidated financial statements should be analysed to understand the overall financial position of the group, even though, under normal circumstances, the law may not require consolidation of financial statements.

(g) Cash flows and fund transfers between group entities need to be traced to identify any circular transactions or improper fund diversions.¹⁴

Further, the impact of potential avoidance actions on the group as a whole must be considered:

(h) Reversing a transaction beneficial to one entity might have negative consequences for the group’s overall restructuring efforts.

(i) The approach should balance the interests of individual creditors with the broader goal of maximising value for the entire group.¹⁵

Such change in approach on avoidance transaction, also calls for revisiting the provision authorising the resolution professional to make a decision on approaching adjudicating authority for avoidance transactions. It is better left at the discretion of the committee of creditors who can take commercial decision to pursue the same or leave it for successful resolution applicant to pursue.

All these calls for appropriate provisions by way of amendment to the IBC.

(7) Enhanced coordination

For making group insolvency resolution effective, requires enhanced coordination. Say, information sharing and cooperation between insolvency professionals handling different group entities should be mandatory (particularly where more than one insolvency professionals are appointed and particularly where one of the group entities is a financial services provider, requiring appointment of an administrator).

As recommended in the Report of the Working Group on Group Insolvency (September 2019), a group coordinator may be appointed to oversee the identification and analysis of inter-company transactions.¹⁶

(8) Pre-cursor to cross-border insolvency of group

The amendment to the IBC on group entities, will pave way for the cross-border insolvency at appropriate time in future.

Supporting regulatory framework

Post-IBC amendments, IBBI regulations can detail:

(a) Procedural aspects of coordination.

(b) Information sharing protocols.

(c) Documentation requirements.

(d) Voting mechanisms.

This two-tier approach (legislative + regulatory) would provide:

(1) Legal certainty through clear statutory foundation.

(2) Flexibility through regulatory framework.

(3) Comprehensive coverage of substantive and procedural aspects.

(4) Better alignment with international practices.

Conclusion

The current proposal to handle group insolvency through regulations alone, while well-intentioned, may face legal challenges and practical limitations. A comprehensive amendment to the IBC would provide the necessary legal backbone for effective group insolvency resolution, while regulations can flesh out the procedural details.

International experience, particularly from jurisdictions like Singapore,¹⁷ demonstrates that group insolvency frameworks work best when embedded in primary legislation. India’s insolvency regime would benefit from such a robust legislative foundation, supplemented by detailed regulations.

The IBBI’s discussion paper has rightly identified the need for group resolution mechanisms. Building on this initiative through appropriate legislative changes would create a more effective and legally sound framework for handling the complexities of modern corporate groups in insolvency.