[By Isha Khurana]

The author is a student of Jindal Global Law School.

 

Introduction  

The NCLAT in a January 2023 decision, reiterated the need to lift the corporate veil in matters of group company insolvencies. In doing so, it followed the path laid down in the 2021 CBIRC-II (hereinafter, “CBIRC-II Report”). This subject has been long debated in India and has found itself at the center of various working groups and committee reports. The 2019 working group report was the beginning of India’s recognition of the growing need to incorporate a provision for group company insolvencies, noting the shared control and economic interdependence of corporates. This, at the time, was deemed a win since the only preceding authority was the 2018 report of the insolvency law committee, which placed limitations on the growth of the group insolvency process. The 2018 report limited the scope of group insolvencies in India, by observing that since the insolvency code was only introduced in 2016, it may be “too soon” to introduce such a group company complexity in the statute.   

Nevertheless, both the 2019 working group report and the 2021 CBIRC-II report have altered the course for group company insolvencies in India. While previous articles have addressed the nuances of group company insolvency, it is essential to consider the pivotal role played by reports such as the 2019 working group report and the 2021 CBIRC-II report. This article aims to revisit the discussion through the lens of the CBIRC-II decision and the January 2023 decision, to delve into the future of group company insolvencies in India. It attempts to incorporate the family-dominated business environment of India in this discussion, to stress the increased need for a group insolvency procedure. Through this, the article flows into an evaluation of whether the alleged conflict between group insolvencies and the separate legal entity doctrine could hamper the adoption of a group insolvency regime.  

Contextualizing Group Companies in India  

The 2021 CBIRC-II report fared well in establishing jurisprudence on which corporate groups could be deemed as group companies in India and what factors must exist for the same. A perusal of the committee’s deliberations on the definition of a “group” highlights the importance of shared control, common shareholding, and interdependence among members of a corporate group, for them to be termed as a group company structure. It thus becomes clear that an inclusive definition of “group” must be included in India’s insolvency regime and reliance may be placed on either control or ownership to establish the existence of a group company structure.  

It is argued here that the business environment in India will be complemented by this definition. India is known to be home to several family-run businesses, both in the public and private sectors. The existence of such family-run businesses opens the doors for situations wherein holding companies exercise control over their subsidiaries (essentially, a vertical relation) and also for members of the same corporate group (a horizontal or lateral relation) to impact one another, through economic dependence. Thus, the insolvency regime needs to address the same, for promoting equity and fairness, and ensuring the protection of creditors.   

The focus on control and ownership factors in the leading elements in establishing group company structures in the Indian context. Owing to the fact that it is commonly observed for common shareholding to be present with corporates exercising control over one another’s activities. Additionally, the deliberations of the working group coupled with the decision in Videocon, also open up the possibility of establishing a group company structure through the presence of common assets, pooling of recourses, interlinked financing, and so on. Thus, judicial decisions and committee reports work well with one another to account for a broad range of scenarios wherein a group company structure may be present.  

As India’s corporate environment is dominated by family businesses (arguably, more than any other jurisdiction), it becomes all the more important that an efficient group company insolvency and recovery regime is in place. The same stems from the increased likelihood of corporations exercising control over each other’s operations and decisions. Further, given the operation of businesses in India, where significant control and decision-making power are shared, it becomes easier to pierce the corporate veil, and to allow for the institution of insolvency proceedings against a group of companies that are acting together. However, some may be apprehensive about initiating proceedings against a group of companies, as it may violate the separate legal entity principle, by treating different corporate entities as akin to one another. Thus, an analysis of whether the process of lifting the corporate veil for group insolvencies would contradict the separate legal entity principle must be undertaken, through the lens of judicial decisions.   

A Judicial Lens to Piercing the Corporate Veil 

Scholars and committee reports have repeatedly noted that insolvency laws are based on the principle of corporations being separate legal entities, following the jurisprudence laid down in Saloman v Saloman. The principle in insolvency law has come to be viewed as one that also distinguishes companies from their subsidiaries or holding companies, advancing from the view that a company is distinct from its members. Thus, binding corporate bodies belonging to the same group of companies was thought of as going against the basic tenets of corporate law.  

However, jurisprudence which allows courts to lift/pierce the corporate veil has found its place in insolvency law as well. Practice now allows for the veil to be lifted in situations where associated companies are connected in a manner that they come to be treated as a single concern. The CBIRC-II sheds light on when companies may be treated as a single concern or rather, what links must be present for the same. The most commonly observed would be situations where companies have linked operations or finances when they own shared assets, and engage in related party transactions. In such scenarios, carrying out individual insolvency proceedings for one entity would be fruitless as a creditor would not be able to efficiently exercise their claim, due to another corporate entity having a vested interest in the claimed assets.  

Since such situations were becoming increasingly prevalent across jurisdictions, courts became less reluctant to lift the corporate veil, given that the facts of the case demanded the same. The 2023 NCLAT decision may be used as a guiding authority in understanding the prerequisites to lift the corporate veil. Therein, the tribunal found that since companies belonging to the same group were acting in concert to the extent that the companies were guided by a “controlling mind”, there was a necessity to lift the corporate veil.  

The tribunal, while referring to precedents on this matter, observed that there must be the presence of public interest as an important factor to lift the veil. This factor will arguably be present in most insolvency cases, especially those involving public sector companies due to their largely dispersed shareholding and impact on the market. Thus, having a public interest as a deciding factor will work in favour of creditors. Additionally, the tribunal discussed the importance of piercing the veil, as a means to unravel the complexities of transactions in a group of companies and understand the role and conduct of each company, to conclude whether there could be fraud or misconduct.  

Another important observation was made in the discourse surrounding the object of the insolvency and bankruptcy code. Many have taken the separate legal entity argument to mean that body corporates cannot be viewed jointly and that this is an inevitable limitation of insolvency law. This argument has been used to the extent that companies may be excused even in cases of misconduct, as there is no provision for legal action against groups. However, the tribunal rightly stated that one cannot use the corporate veil argument to abuse provisions of the IBC or misuse them in their favour, to avoid penalties. Thus, while it was upheld that the corporate veil must be lifted in rare situations, the lifting of the veil must simultaneously be viewed in a manner that aligns with the IBC’s vision and upholds fairness and public interest.  

Conclusion  

A combined reading of the CBIRC-II and the 2023 NCLAT decision highlights the need to incorporate a procedure for group company insolvencies in Indian statute. It has been over 2 years since the committee’s deliberations in CBIRC-II were noted and there is yet to be any parliamentary recognition of the same. This paper thus, emphasized the need to include group company insolvencies, keeping in mind the family-dominated business structure of India. For the same, the shared control and ownership features, which family businesses and group company structures have in common, were given heed to. 

On a positive note, this article placed the spotlight on the 2023 decision, to stress that the limited legislative discourse has not hindered the judiciary’s active recognition of this matter and has created room for future development. It analysed the decision to resolve the apparent conflict between group company proceedings and the separate legal entity principle. Thus, it is argued that the NCLAT 2023 decision (with its several precedents) must be taken as the foremost authority, especially to the extent to which it clarifies the role of the corporate veil in group insolvencies.