A New Case Law relating to Group Insolvency- By Raghuram Manchi, Insolvency Professional

This article highlights another case decided by NCLT, Kochi bench last month, vide its order dated 20.04.2020, based on the principles laid down in the aforesaid cases in resolving issues related to group insolvency. This order was passed on MA/25/KOB/2020 in IBA/38/KOB/2019, Sanghvi Motors Limited & Ors Vs M/s Albanna Engineering (India) Pvt Ltd. The particulars of this case are given in the following paragraphs.

Raghuram Manchi
Insolvency Professional

A New Case Law relating to Group Insolvency

The practitioners of Insolvency Law would have come across situations where the corporate debtor in a CIRP does not have assets for insolvency resolution in a meaningful way, but there would be holding companies or associate or subsidiary companies of the same group who have good assets.  But those assets can not be touched because they belong to a different entity, though that entity is either promoted or controlled by the same or substantially same promoters. This is because IBC does not have provisions or a mechanism to consolidate the assets and liabilities of group companies or to consolidate CIRPs and work together for insolvency resolution of more than one company belonging to the same group.

Group insolvency resolution is said to be a complex subject and it was decided by the law makers in our country that the Insolvency Law being new to India, it may be too soon to introduce such a complex subject.[1] The rationale being that group insolvency could involve lifting of the corporate veil which could affect the corporate debtor significantly and hence could be taken up after the present system is well established.

But the issues of insolvency among corporate debtors which are part of complex corporate group structures did not wait. The courts had to deal with prayers for consolidation of cases of group companies, notwithstanding the fact that there are no provisions in IBC at present for the same. In the case of State Bank of India Vs Videocon Industries Limited (VIL) & Ors (MA/2385/2019 in C.P.(IB)-02/MB/2018 dated 12.02.2020 of NCLT, Mumbai Bench) the Adjudicating Authority, while dealing with applications for piercing the corporate veil of the company and considering the group companies as one, observed that “……considering the high stakes of the stakeholders and the lengthy arguments raised by various parties demanding a verdict urgently on the issue of ‘ Consolidation’ , no choice is left but to take the call, although with due care that not to exceed the jurisdiction enshrined in the Insolvency Code.

Supreme Court also considered the matter of lifting of the corporate veil in the case of Arcelomittal India (P) Ltd. vs. Satish Kumar Gupta reported in (2019) 2 SCC 1, and held that  “…where a statute itself lifts the corporate veil, or where protection of public interest is of paramount importance, or where a company has been formed to evade obligations imposed by the Law,  the court will disregard the corporate veil. Further, this principle is applied even to group companies, so that one is able to look at the economic entity of the group as a whole….the Court may pierce the corporate veil for the purpose and only for the purpose of depriving company or its controller of the advantage that they would otherwise have obtained by company’s separate legal personality”.

This article highlights another case decided by NCLT, Kochi bench last month, vide its order dated 20.04.2020, based on the principles laid down in the aforesaid cases in resolving issues related to group insolvency. This order was passed on MA/25/KOB/2020 in IBA/38/KOB/2019, Sanghvi Motors Limited & Ors Vs M/s Albanna Engineering (India) Pvt Ltd. The particulars of this case are given in the following paragraphs.

CIRP of Albanna Engineering (India) Pvt Ltd., (AEIPL)

M/s Sanghvi Motors Limited, an operational creditor, applied for initiation of CIRP of the corporate debtor (CD), M/s Albanna Engineering (India) Pvt Ltd., (AEIPL), under Section 9 of IBC. The Application was admitted and CIRP was initiated vide the order of NCLT dated 25th October 2019. On the basis of claims received in response to the public announcement, COC was constituted on 19th November 2019.

Corporate Debtor(CD), a subsidiary:

The CD is actually a subsidiary, 100% owned by a Dubai based company called M/s Albanna Engineering LLC, Dubai (AELLC), promoted by Mr Saeed Ahmad Mohammmad Saleh Albanna. The promoter/directors of this company are the promoters and directors of the Indian subsidiary also. AEIPL, the Indian subsidiary, was formed exclusively to execute a contract given by Bharat Petroleum Corporation Ltd, Kochi (BPCL) to AELLC. This subsidiary had no prior experience of any other work nor undertook any other activity.  AEIPL, in turn engaged other sub-contractors for completion of the works. Also, AEIPL borrowed Rs.14.50 Cr from Punjab National Bank based on personal guarantee of the directors. What is noteworthy is that AEIPL neither had any other assets nor receivables nor any contractual relationship with BPCL. The invoices for the work completed was to be submitted by AELLC and payments were to be made by BPCL to AELLC only. As part of the terms of contract, AELLC had given two bank guarantees to BPCL amounting to Rs. 24.67 Cr as performance guarantees.

Default by the Corporate Debtor:

AEIPL failed in making payments to its sub-contractors for the work completed by them. Thus, default occurred, prompting the applicants to approach NCLT for initiation of CIRP of AEIPL, the Indian subsidiary. CIRP was initiated as said above, but soon it became clear that the CD is only a shell company and did not have any assets or net worth for the creditors to cover their dues. Nor any resolution applicant was likely to submit any resolution plan because the contract with BPCL is not in the name of the CD. On the other hand, the creditors did not have any claim on the Dubai based holding company. Thus, the CIRP appeared to have reached a dead end.

Miscellaneous Application of the Operational Creditors(OCs):

At this stage, OCs filed an application before NCLT under Section 60 (5) of IBC seeking an injunction/ direction to the Respondent No. 4(BPCL),  to invoke the bank guarantees furnished by the parent company, AELLC and use the proceeds for resolution of the corporate debtor.

Issues before NCLT :

1. Whether the assets of the holding company, AELLC, can be utilized for settling the claims of creditors arising out of CIRP?

As there is common control, management and 100% shareholding by the parent Company, the assets of the parent company are not different and distinct from the assets of the Indian subsidiary. Thus, the Adjudicating Authority decided to consider this case to be a case involving group insolvency.

2. Whether the instant case is a fit case for piercing the corporate veil?

The management and ownership of these companies are same. Both the companies are evidently interconnected, inter-woven and interlaced to much greater extent. As there is no revenue for AEIPL, the obligations of each other are also intermingled and have to be treated as one single economic entity. Thus, the assets and properties, including any claim, interest therein, of AELLC held through AEIPLL will have to be said to be the property of the Corporate Debtor, for the purpose of the present CIRP.

Accordingly, in order that the parent company cannot get away from its obligations towards the contractors/ suppliers engaged by the Corporate Debtor and taking into account that there are no worthwhile assets in the name of Corporate Debtor in India to fall back, the Adjudicating Authority decided to consider the assets of both AELLC and AEIPL together for the purposes of CIRP.

3. Whether an amount of Rs.5.40 Cr (less TDS) payable by BPCL to parent company AELLC can be utilized for resolution of the insolvency of the corporate debtor?

The Adjudicating Authority decided that amount being payment towards the work executed by the CD for the parent company will come under the definition of the assets of the corporate debtor. This is because the CD performed the project for the parent company and so is eligible for the receivables. The parent company is responsible to make good the cash loss to the CD to settle the creditors’ claims arising out of CIRP.

4. Whether BPCL can invoke the guarantees given to it by AELLC, which are primarily performance guarantees.

Whereas a financial guarantee promises repayment of money in case of non-completion of the contract by client, a ‘performance guarantee’, on the other hand provides a promise of compensation in case of inadequate or delayed performance of a contract. In both financial guarantee and performance guarantee, the liability of the bank is reduced to financial compensation only. In the instant case also, the Banks will compensate the Respondent no.4 for non-performance by way of financial payments only. As such, the performance guarantees in this case can be invoked as part of CIRP.

5. There are already attachment orders/garnishee orders on BPCL in respect of the money payable to AELLC, in connection with the cases filed by creditors in several courts. How the money can be considered for claims under CIRP?

The moratorium declared vide the order dated 25.10.2019 along with initiation of CIRP prohibits the institution of suits or continuation of pending suits or proceedings against the Corporate Debtor or its parent company, including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority. Section 14 read with Section 238 of Insolvency & Bankruptcy Code, 2016 is applicable.

Accordingly, the Adjudicating Authority directed BPCL to invoke the bank guarantees amounting to Rs.24.67 Cr and keep the proceeds as a fixed deposit and deposit the fixed deposit receipt with NCLT, until further orders.

Thus, we have another path-breaking case law for dealing with the cases involving group insolvency.


[1] “Report of The Insolvency Law Committee” dated 26th March 2018”; Sr No 17 in Annexure II- Summary Response to Comments, page 83.


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