6 days ago
- Business
- New Indian Express
Group insolvency framework: When one is not for all
The principle of separateness is no minor technicality. It lies at the heart of company law. The landmark 1896 ruling by the British House of Lords, in Salomon vs Salomon & Co, established that once incorporated, a company acquires its own legal identity, distinct from its shareholders, directors, or affiliates. This was more than a formalism; it unleashed the modern economy, shielding personal assets from business risks and allowing capital to move freely. India's Supreme Court has affirmed this on many instances, underscoring that corporate separateness is not a legal fiction to be set aside for convenience, but a deliberate construct governing credit, liability, and risk.
The IBC reflects this. It treats companies as distinct legal persons, with debts, defaults, and proceedings that are all individually determined. Section 3(7) defines a 'corporate person' in individual terms—one corporation at a time. Section 5(8), which defines 'financial debt,' presupposes a direct relationship between debtor and creditor, not a complex web of inter-corporate obligations. And from Section 6 onwards, the entire resolution mechanism is built around initiating proceedings against 'a corporate debtor'—not a group, conglomerate, or an economic cluster.
Of course, the notion that each company is a sealed legal island has its exceptions. Courts in India and abroad have occasionally 'pierced' the corporate veil—especially when the structure is used to commit fraud or evade the law. As early as 1933, Lord Denning remarked that courts could 'pull aside the corporate veil' to see the true actors behind it (Gilford Motor Co vs Horne). Indian courts have likewise reaffirmed that corporate identity is not a shield for misconduct. But these are the exceptions to the rule, triggered by fact-specific abuse, not tools for convenience or policy innovation.
The call for a group insolvency framework stems from real-world frictions, not just theory. Consider the Srei Group, where both the parent and its subsidiary were forced into parallel insolvency proceedings, despite shared cash flows, cross-guarantees, and overlapping liabilities. This created a procedural quagmire: creditors filed claims in both forums, there was confusion over ownership of assets, and value was steadily lost. The Videocon case posed an even starker dilemma. Thirteen companies, all functionally run as one business, were admitted into distinct CIRPs—only to be later resolved collectively by judicial innovation, not legislative design.
