Freezing of Folios of physical shareholders... Last date for KYC is 30th September 2023... Act now Ref: SEBI Circular SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2023/37





In the previous article, we had discussed in detail the group insolvency.  You may have a glance at what group insolvency framework is via Click Here.

In this article we will dive into the details of the framework aligned for tackling group insolvency.

The Working Group has considered the following elements to address all issues arising in the insolvency of companies in a group:

  • Procedural Coordination Mechanisms: Coordinating the procedures of insolvency while keeping the assets of each group company detached and unrelated.
  • Substantive Consolidation Mechanisms: Consolidating the assets and liabilities of different groups are targeted so that they are treated as part of a single insolvency estate with the motive of reorganization or distribution in liquidation.
  • Rules dealing with perverse behavior of companies in corporate groups: The creation of Mechanisms will be enabled to recapture assets subject to prejudicial transactions between group members and impose liability in group companies for each other’s debt. 


The recommendations have been made by the working group that the framework for the group insolvency should be introduced in a phased manner and their phasing should be done in two bases:

  • Jurisdictional scope: It was noted by the working group that the insolvency law committee formed by the ministry of corporate affairs recommended changes to the provisions of the code dealing with the cross-border insolvency of debtors with assets in different jurisdictions. The implementation of the provisions pertaining to cross-border insolvency of debtors with assets in different jurisdictions is not complete.  The framework for insolvency of cross-border corporate groups that aligns perfectly with the regime for insolvency of cross-border companies may not be possible in these circumstances.
  • The Working Group recommended that the framework for the group insolvency may cover only domestic entities in its first phase.
  • Elements of the Framework: It was noted by the Working Group that comprehensiveness framework for group insolvency could include procedural coordination, substantive consolidation, rules against perverse behavior, and other rules.
  • The recommendation was made by the working Group that the framework may not include substantive consolidation in its first phase.  The further recommendations were made by the Working group in which they recommended that to implement the elements of the framework on group insolvency in the first phase, extensive capacity-building of insolvency professionals, creditors and other stakeholders under the code should be undertaken by IBBBI and the Central Government, and necessary infrastructure, especially to facilitate communication and coordination amongst Adjudication Authorities, should be put in place to ensure that the recommendations of the Working group can be implemented seamlessly.

Here we also need to understand what group means.


  • The Working group is of the view that the framework should define ‘Corporate group’ which is not defined under insolvency and bankruptcy code. It is also noted by the working group that the term Corporate Group, Group Company, Subsidiary, etc is defined under the other acts, regulations in India, and different accounting standards
  •  In The foreign Direct Investment policy Article 2.1.12 defines Group Company as “two or more enterprises which, directly or indirectly, are in a position to (i) exercise twenty- six percent or more of voting rights in the other enterprise; or (ii) appoint more than fifty percent of the members of the board of directors in the other enterprise or (iii) control the management or affairs of the other enterprise”.
  • In paragraph 2 of the systemically important non-banking financial (NON – Deposit Accepting or Holding) Companies Prudential norms (Reserve Bank) directions, 2015 issued by the Reserve Bank of India (RBI), defines companies in the group to mean two or more entities which are related to each other as subsidiaries, joint ventures, associate companies, promoter-promoters or have a common brand name and investment in equity shares of more than 20%. Similar definition has been included in the RBI Act, 1934 by Finance (no.2) Act, 2019.
  • In the Regulation 2(1)(t) of the SEBI(Issue of Capital and Disclosure Requirements) Regulations, 2018 defines Group Company in the context of the related party transactions and states that group companies include “such companies(other than promoters and subsidiary/subsidiaries)with which there were related party transactions, during the period for which financial information is disclosed as covered under the applicable accounting standards, and also other companies as considered material by the board of the issuer.”
  • Group Company is not defined in the Companies act 2013, but it defines holding and subsidiary companies based on a relationship of control. A subsidiary company under section 2(87) of the Act defines as the one in which “the holding company”
  • controls the composition of the board of directors or
  • exercises or controls more than one-half of the total voting power either at its own or together with one or more of its subsidiary companies”
  • Section 2 (6) of the Act also defines an Associate Company in relation to another, as n associate company in relation to another, as a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence but which is not a subsidiary company of the company having such influence and includes a joint venture company.”

The accounting standards also define the term ‘group of companies’. The Indian Accounting Standard –Ind AS 110, regarding consolidated Financial Statements issued by the Ministry of Corporate Affairs defines Group to mean “a parent and its subsidiaries” wherein the parent is “an entity that controls one of more entities” and a subsidiary is “an entity that is controlled by another entity.” It also defines control of an investment as a situation “when the investor is exposed, or has rights to variable returns from its involvement with the invested and has the ability to affect those returns through its power over the invested.

It was noted by the working group that these legislation and accounting standards define the group in reference to ownership and control. However, it also noted by the working group that corporate group is defined in this legislation and standards in a specific context, which may not always be applicable in the context of insolvency of group companies.

International frame dealing with the insolvency of companies in a corporate group also define ‘Corporate Group’

  • In the Art 2(13) of the regulation (EU) 2015/848 on insolvency proceedings (recast) (“EU Regulations”) that came into force in 2017 defines a group of companies to mean “a parent undertaking and all its subsidiary undertaking”.
  • A Group is defined in the Insolvenzodnung in Germany (“German Legislation”) as legally independent enterprises that have the center of their main interests on domestic territory and are directly or indirectly affiliated with one another due to (i) the ability to exercise a controlling influence or (ii) consolidation under common management. This is applicable to partnership as well as companies. Whereas, the United States Federal Rules of Bankruptcy Procedure make these framework applicable to “affiliated companies”.
  • Part (III) of the UNCITRAL Legislative Guide on Insolvency Law on Treatment of enterprise groups in insolvency’ (“UNCITRAL Guide”) defines an enterprise group as “two or more enterprises that are interconnected by control or significant ownership”, with control being “the capacity to determine, directly or indirectly, the operating and financial policies of an enterprise”. It is relevant to note that this definition takes into account horizontal integration between companies (which occurs when there is cross-ownership) as well as vertical integration (which occurs when there are layers of parents and subsidiaries).

While defining the Corporate Group for the purpose of this framework including extent of control, operational and financial dependency, ownership, common-brand or co-owning of intellectual property rights the Working Group has discussed various factors.

In the view of the Working Group, the corporate Group should be defined so that stakeholders can assess ex ante if any elements of this framework could be applicable to them, without attracting litigation to determine the applicability of the frame in the first place. This will have ex-ante benefits and avoid litigation which would add time and costs to the insolvency resolution of companies to whom the applicability of this framework is being assessed. It is recommended by the Working Group that a definition of the group should be provided, so that a case-by-case analysis need not be made to assess the applicability of the framework. And for the purpose of defining ‘Corporate Group’ for this framework, the Working Group noted that the definition should cover those companies that have interlinkages that raise the special issues in the insolvency of companies in a corporate group. These interlinkages can occur in horizontally as well as vertically integrated groups.

On analyzing the domestic and international definitions of the Corporate Groups, it seems that factors of control and ownership are common across definitions and these factors are likely to account for the horizontal and vertical interlinkages. The working Group is of the view that these factors are best reflected in the definitions of Holding, subsidiary, and associate Companies in the companies Act, 2013. Together these take into account both horizontal and vertical integrations between group companies. The Working group further believed that relying on the definitions in the companies Act 2013 which is the statue governing companies in the country will provide certainty and clarity to all the stakeholders. The working Group recommended that this framework should be made applicable to a ‘Corporate Group’ that is defined to include holding, subsidiary, and associate companies.

The working Group further recommended that an application can be made to the Adjudicating Authority to include companies that are so intrinsically linked as to form part of a ‘Group’ in commercial understanding but are not covered by the definitions mentioned above as long as it can be demonstrated that this will result in maximization of value of the insolvent company without destroying the value of the company being included so that there is overall value maximization.

Hope that this article provided crux about the framework for tackling group insolvency.

Stay connected with MUDS for more updates.

Previous Post
Newer Post