SUBSTANTIAL CONSOLIDATION IN IBC
Updated: May 1, 2021
- Madhav Ved
A company is a separate legal entity. This is one of the fundamental principles of a Company Law. There have been various exceptions to this rule that have been carved out in history. One of the widely discussed is the Principle of lifting of Corporate Veil where the persons making the decisions are held to be liable towards the acts done on behalf of the company. This can be termed as vertical consolidation wherein persons making decisions on behalf of the company are to be held liable. On the contrary horizontal consolidation is when companies of equal legal status are merged together in order to consider them a single entity and pool in the assets and liabilities.
The concept of substantial consolidation of companies is not however a new one and has been used extensively by various other countries like the U.S.A., Canada.
There is an absence of a specific statute in India with respect to Consolidation of Company Suits. Ordinarily, in a civil suit, the provisions of the Civil Procedure Code under section 151 would apply to civil suits in order to hear two cases arising of the same cause of action to be heard jointly in order to avoid multiplicity of proceedings. Such provisions have also been vested upon the Hon’ble High Courts and Supreme Court where it can transfer the cases or bring before itself any case or two or more cases before a subordinate court in order to bring out justice. Additionally, even in Criminal Procedure there exists a provision in order to hear two or more cases together for the same offences.
It must be noted that the civil and criminal provisions of the law are merely in order to reduce the procedural burden upon the courts and to reduce multiplicity of proceedings before several different courts.
The landmark case in the Indian context is the Videocon Judgement along with Axis Bank vs Lavasa Corporation Ltd., which is discussed widely as being the very first and the only case in which the NCLT, Mumbai Bench applied the rule of substantial consolidation wherein 13 out of 15 companies were consolidated in order to merge the assets and liabilities. The points that were relied upon in order to qualify for the Substantial Consolidation are: i. Common Control; ii. Common directors; iii. Common assets; iv. Common liabilities; v. Inter- dependence; vi. Inter-lacing of finance; vii) Pooling of resources; viii) Co-existence for survival; ix) Intricate link of subsidiaries; x) Inter-twined accounts; xi) Inter-looping of debts; xii) Singleness of economics of units xiii) Common Financial Creditors xiv) Common group of Corporate Debtors. It was also held that it may not be necessary that in each and every case all of the above-given points shall be fulfilled and may vary upon facts and circumstances of each case.
Moreover, India has been a signatory and member to the UNCITRAL and has also adopted the UNCITRAL Laws on Cross-border insolvency vide Article 253 of the Constitution and §234 of the Insolvency and Bankruptcy Code, 2016, strong reliance is placed on UNCITRAL Legislative Guide on Insolvency Law Part 3(2004) wherein the process, implementation and execution of Substantial Consolidation of Companies has been elaborately explained. The above-mentioned points to be considered for Substantial Consolidation have also been dealt with in detail, specifically in Chapter II, Sub-part D, Sub-section 3, Point 112. It is quite crucial to reiterate the same here,
“A number of elements have been identified as relevant to determining whether or not substantive consolidation is warranted, both in the legislation that authorizes substantive consolidation orders and in those cases where the courts have played a role in their development. In each case, it is a question of balancing the various elements to reach a just and equitable decision; no single element is necessarily conclusive, and all of the elements do not need to be present in any given case. Those elements have included: the presence of consolidated financial statements for the group; the use of a single bank account for all group members; the unity of interests and ownership between the group members; the degree of difficulty in segregating individual assets and liabilities; the sharing of overhead, management, accounting and other related expenses among different group members; the existence of intra-group loans and cross-guarantees on loans; the extent to which assets were transferred or funds moved from one member to another as a matter of convenience without observing proper formalities; the adequacy of capital; the commingling of assets or business operations; the appointment of common directors or officers and the holding of combined board meetings; a common business location; fraudulent dealings with creditors; the practice of encouraging creditors to treat the group as a single entity, creating confusion among creditors as to which of the group members they were dealing with and otherwise blurring the legal boundaries of the group members; and whether substantive consolidation would facilitate a reorganization or is in the interests of creditors.”
Hence it can be seen that a wide array of factors have been mentioned for the same and each and every factor must be dealt individually before the Tribunal.
Countries like Canada have implemented the concept of Substantial Consolidation into independent statute in order to ease the process.
The abovementioned authorities range widely from judicial precedents to international legislative guides and foreign judgements and statutes. The relevance also would depend upon other factors such as facts and circumstances revolving around the case, interpretation of the statutes, etc.
The legislative guide by UNICITRAL is quite relevant in terms as, India being a signatory and has an obligation to honour international agreements. Moreover, the same has been practiced before when there was the absence of provisions regarding harassment of women at workplace wherein the Hon’ble Supreme Court relied upon CEDAW, 1981(Convention on the Elimination of All Forms of Discrimination against Women) to bridge the gap between the lack of such provision. Hence, relying upon this logical analogy and inference the provisions of Part III of legislative guide on insolvency by UNCITRAL, Chapter II, Sub-part D, Sub-section 3, Point 112
In the case of United States Bankruptcy Code, Chapter 11, Substantial Consolidation can be ordered under §1123, as a mode of reorganisation of assets of the Corporate Debtor in the resolution plan. In the mentioned statute various measures have been specified as a measure to maximise the asset realisation of the debtor.
In the case of Chemical Bank New York Trust Company v. Kheel which was heard before the US Court of Appeals, Second Circuit, wherein 8 Corporations were owned by a single entity were ordered to be consolidated under the above-mentioned chapter X of the US Bankruptcy Code, on the very grounds that the Corporations were owned jointly by a single entity and that they were so intertwined with the inter-corporate loans and guarantees that consolidation was in the best interests of the Conglomerate. It must be noted that the concept of Substantial Consolidation was first derived in the United States and was then incorporated by various other nation-states. In the aforementioned judgement, Judge Smith noted that
“Evidence of the fact that loans were made back and forth, borrowings made by some to pay obligations of others and various other circumstances the consolidation of the 8 Corporations was in the best interest of the Group”
It was held in Vecco Construction case that if there is a possibility of unfair treatment, the demand for consolidation could be questioned. In another case it was held “Before ordering consolidation, a Court must conduct a searching inquiry to ensure that consolidation yields benefit offsetting the harm it inflicts on objecting parties”. Hence, it can be seen that even where there is a law relating to the consolidation of entities, it cannot be exercised arbitrarily, and an inquiry must be conducted in order to assess the position before after such consolidation and which one is more beneficial.
Madhav Ved is a fifth year student at Pravin Gandhi College of Law, Mumbai.
 Salomon v. A Salomon & Co. Ltd.,  UKHL 1,  AC 22.  Salomon v. A Salomon & Co. Ltd.,  UKHL 1,  AC 22.  Companies Creditors Arrangement Act, 1985.  INDIA CONST. Art. 139A, Art. 142, Art. 228.  Code of Criminal Procedure, 1973, Chapter XVII.  Videocon, IA No. 1031 of 2020 in [CP (IB) No. 01/MB/2018].  Lavasa Corporation Limited & Ors. v. Girish Vassan Panjwani & Ors., MA 3664/2019 in C.P.(IB)-1765, 1757 &574/MB/2018.
 United Nations General Assembly Resolution, 2205 (XXI).
 Status, The UNCITRAL Model Law on Cross-Border Insolvency (1997), 22 October 2020, http://www.uncitral.org/uncitral/en/uncitral_texts/insolvency/1997Model_status.html.
 Constitution of India, 1950.
 Status, The UNCITRAL Model Law on Cross-Border Insolvency (1997), 22 October 2020,
 Companies’ Creditors Arrangement Act, 1985.
 Vishaka and Ors. v. State of Rajasthan and Ors., 1997 (6) SCC 241.
 The United States Bankruptcy Code, amend. 2005.
 Chemical Bank New York Trust Company v. Kheel, 369 F. 2nd 845.
 Vecco Construction Industries, INC and others; Bankruptcy No. 79-224-A United States Bankruptcy Court E.D. Virginia.
 Auto-Train Corporation, Inc. Florida Corporation 810 F.2nd 271(D.C. Cir. 1987).