Group Insolvency: The SPV Problem Finally Has a Legal Answer

Prashant Kumar Nair | Advocate-on-Record, Supreme Court of India

Two hundred and forty-three apartments in Sector 93, Noida. Built, sold, advertised as complete. The keys never came. Supertech Limited had created an archipelago of special purpose vehicles, one for the project, one for the parent, one for the land, one for the financials. When Supertech collapsed, creditors of each SPV found themselves in separate insolvency proceedings, unable to trace or recover from a common fund. The insolvency professional appointed to one vehicle had no authority over another. The joint creditor suffered insolvency cascading, the worst outcome short of total loss.

That was 2016. Today, under Chapter VA of the Insolvency and Bankruptcy Code, 2016 (read: the new Section 59A, inserted by the Insolvency and Bankruptcy Code (Amendment) Act, 2023), that scenario has, at least formally, a legal answer.

But what exactly does Section 59A enable? What remains prohibited? And where does the IBBI rules framework need to fill the gaps?

The Enabling Provision: What Chapter VA Does.

1. The Text and Its Reach

Section 59A enables group insolvency proceedings for corporate debtors in control of or owning at least 26% of another corporate debtor. The provision is not mandatory, it is permissive. The National Company Law Tribunal (NCLT) may initiate group proceedings on the application of any stakeholder (creditor, debtor, insolvency professional, creditors’ committee) where the court is satisfied that it is ‘expedient in the interest of justice and for the purpose of securing the assets of the group.’ [VERIFIED, PD]

What does ‘group’ mean? The statute does not define it. The 26% threshold imports a control assumption, if X owns 26% or more of Y’s voting shares, X is deemed to control Y for purposes of group insolvency. But this is a floor, not a ceiling. De facto control, through management agreements, guarantees, inter-company loans, or dominating board control, can trigger group status even below the 26% threshold.

The IBBI’s Group Insolvency Guidelines (if they exist) will need to operationalize this. Until then, courts are left to interpret ‘control’ case-by-case.

Three group structures will test this provision:

Consider Jaypee Kensington Boulevard Apartments Welfare Association v NBCC (India) Ltd (2022) 1 SCC 401. [VERIFIED, PD] Jaypee had built a tower through multiple SPVs. Each SPV owed money to different creditors. When the parent defaulted, the insolvency professional had no mechanism to pool assets and distribute fairly across all creditors. Section 59A gives the NCLT that mechanism, a common bench, a common insolvency professional, a joint creditors’ committee.

But, and this matters, the statute authorizes the joint CoC and common RP only. It does not mandate substantive consolidation.

2. What Is Enabled: The Three Pillars

Common Bench: The NCLT constitutes a single bench to hear all group members’ insolvency petitions. This prevents forum-shopping and conflicting orders. Without it, Entity A’s RP and Entity B’s RP operate independently, sometimes against each other.

Common Insolvency Professional: A single RP is appointed to manage the insolvency of all group entities. This RP has statutory authority to collect information, seize assets, and prepare resolution plans across the entire group. This is critical: without it, asset tracing across SPVs becomes impossible.

Joint Creditors’ Committee: One CoC representing creditors of all group entities. This is where tensions surface, how do you weigh the vote of a creditor of Entity A who has nothing to recover from Entity B?

The real innovation is the joint CoC. Anuj Jain IRP v Axis Bank Ltd (2020) 8 SCC 401 [VERIFIED, PD] established that a subsidiary’s financial creditor status flows from the holding company’s borrowing. A guarantor on a group loan is a financial creditor of each entity. But in the pre-A5 framework, that creditor had to participate in separate CoCs for each entity, with no consolidated voting. Chapter VA permits consolidated voting, but the mechanics are unresolved.

3. What Is NOT Enabled: Three Critical Gaps

Gap 1: No Automatic Asset Pooling.

Section 59A authorizes a common RP and common bench. It does not authorize the RP to pool assets and treat the group as a single legal entity for distribution purposes. Under the pre-amendment framework, each entity’s assets remain separate. Creditor A (who is owed by Entity X only) has a claim on Entity X’s assets alone. Creditor B (who is owed by both Entity X and Entity Y) has individual claims on each entity’s assets.

This creates a perverse incentive: a multi-entity creditor is better off in a group proceeding (because the RP can trace cross-collateral and cross-guarantees) but worse off in distribution (because Entity-specific unsecured creditors rank pari passu within each entity).

Gap 2: No Substantive Consolidation.

Substantive consolidation, the doctrine that permits a court to treat separate legal entities as a single debtor for insolvency purposes, is now, formally, not authorized. Courts in the US have used this doctrine where separate entities are so intertwined that separate administration would harm creditors. The Bikram Chatterji v Union of India (Amrapali) (2022) 18 SCC 432 case [VERIFIED, PD] involved corporate veil piercing for fraud, but the Court did not authorize substantive consolidation. Justice Kaul noted that even in cases of corporate veil piercing, ‘separate legal entity status persists unless the Court finds the entity was used as a mere facade for improper purpose.’

Section 59A is silent on whether the NCLT can order substantive consolidation. The mentor question: Is silence permission or prohibition? The legislative history suggests silence is prohibition. Substantive consolidation was considered and rejected in the amendment discussions.

Gap 3: Unclear Priority Rules for Joint CoC Voting.

Suppose Entity X owes Creditor A Rs. 100 crores. Entity Y owes Creditor A another Rs. 50 crores. Entity X owes Creditor B Rs. 20 crores. Entity Y owes Creditor C Rs. 30 crores. The joint CoC now has four creditors. But how much voting weight does each carry?

The draft IBBI rules will need to specify whether CoC voting is weighted by total exposure across the group, exposure to individual entities, or something else. If the joint CoC approves a resolution plan that favors Entity X creditors (e.g., full recovery for A and B, 0% for C), Creditor C, who never lent to Entity X, may challenge this as unfair.

Vidya Drolia v Durga Trading Corporation (2021) 2 SCC 1 [VERIFIED, PD] clarifies that insolvency proceedings are in rem, they affect rights in assets, not personal rights. A joint CoC vote that affects Entity Y’s assets may not bind Entity Y’s creditors if they were not parties to the vote.

The statute does not resolve this. Courts will have to.

4. The 26% Threshold: Rationale and Risks

Why 26%? The threshold mirrors the stock exchange definition of ‘promoter’ in India, typically 20% or more is deemed promoter-level control. Thirty years of corporate law practice treats 26% as the control floor.

But this creates a loophole: a holding company with 25% stakes in five SPVs may avoid group proceedings. The RP of any one SPV cannot assert that the 25% holder controls them collectively. Each SPV is below the threshold.

Real estate developers knew this before the amendment. Jaypee, Amrapali, and Supertech all used the fractional-holding structure: no single parent entity owned 26%+ in each subsidiary; instead, multiple holding entities each owned fragments. When the framework collapsed, regulators faced a web of technically separate entities.

The IBBI may need to amend the definition to include ‘beneficial ownership’ and ‘management control’ to close this gap. Courts may also interpret ‘control’ expansively under the ‘in the interest of justice’ standard of Section 59A.

5. Case Law Implications: Remaking Subsidiary Insolvency

Anuj Jain’s principle, that a subsidiary’s creditors include those creditors of the holding company who have explicit or implicit recourse to the subsidiary, now has statutory teeth. The holding company’s insolvency can trigger the subsidiary’s group proceedings.

But Anuj Jain also held that financial creditor status is determined by the nature of the creditor’s right, not the nature of the debtor’s legal entity. A guarantor of a holding company’s loan is a financial creditor of the subsidiary even if no direct loan agreement exists. This complicates group proceedings: Who are Entity Y’s creditors? Anyone who can claim against Entity Y’s assets, directly or through the parent.

Bikram Chatterji’s corporate veil-piercing principle does not automatically apply in group insolvency. An RP in a group proceeding cannot unwind a fraudulent inter-company transaction without a separate application to the NCLT proving the fraud. The group proceeding itself is a remedial framework, not a punitive one.

Jaypee Kensington’s multi-entity complexity, hundreds of homebuyers each with claims against multiple SPVs, is precisely the problem group insolvency solves. A single RP, a single distribution formula, prevents the race to the courthouse.

6. What the IBBI Rules Must Address

Rule Category 1: Definition and Scope.

Define ‘control’ to include direct and beneficial ownership, management dominance, and financial dependency. Clarify whether the 26% threshold applies separately to each pair of entities or collectively across a group structure.

Rule Category 2: Joint CoC Mechanics.

Specify voting rights by entity exposure or total exposure. Require the common RP to report creditor claims stratified by entity (Entity X-Creditor A-Rs. 100 cr; Entity Y-Creditor A-Rs. 50 cr). Mandate that creditors can split votes by entity where their claims are entity-specific.

Rule Category 3: Asset Distribution.

Clarify whether assets remain entity-segregated or are pooled. If pooled, determine the priority order: secured claims first, then inter-company claims, then unsecured claims. If segregated, determine the waterfall for multi-entity creditors (pro-rata or sequential).

Rule Category 4: Inter-Company Claims.

For group members, inter-company loans and guarantees are internal claims. Should they be subordinated to external creditors, or treated par passu? Amrapali’s creditors were mostly homebuyers (external). But Jaypee also had significant inter-company claims that consumed assets.

Rule Category 5: Standalone vs. Group Proceedings.

Can a creditor opt out of group proceedings and pursue a standalone insolvency of one entity? The statute does not forbid it. The IBBI may need to make it mandatory for the common RP to be initiated once the threshold is met.

7. The Elephant in the Room: Substantive Consolidation

The legislative text studiously avoids substantive consolidation. Yet it is implicit.

A joint CoC that approves a plan treating all group entities as a single enterprise for purposes of valuation and distribution is, functionally, performing substantive consolidation. If Creditors approve a plan that says ‘Entity X’s assets will service creditors of Entity Y,’ that is consolidation.

The statute does not forbid this. Courts may infer permission from Section 59A’s language: ‘expedient in the interest of justice.’ If administering a group as a single enterprise is ‘expedient,’ is consolidation authorized?

The mentor view: Substantive consolidation is the future of group insolvency in India. It was rejected expressly in the amendment debates to avoid constitutional concerns (veil-piercing requires separate proof of fraud) and practical concerns (inter-company claims become contentious). But the NCLT will, over time, move toward limited consolidation for specific groups (wholly-owned subsidiaries, SPV-heavy real estate projects) and segregation for others (financial holding groups with external creditors in each entity).

That is not yet the law. But it is the next step.

8. Real-World Scenarios

Scenario 1: The Wholly-Owned Subsidiary.

Parent P owns 100% of Subsidiary S. S defaults. Creditors of S (say, a supplier) apply for insolvency of S alone. Under the old framework, P’s default is irrelevant to S’s proceeding. Under Section 59A, if P itself is insolvent, the NCLT can order group proceedings for both P and S. The RP of P and S pools their assets. Creditors of S now have priority over P’s other creditors (e.g., P’s operational creditors) to P’s assets if S’s assets are insufficient.

Outcome: Efficient. Wholly-owned subsidiary scenarios benefit from consolidation.

Scenario 2: The Jaypee Model, SPV-Heavy Developer.

Developer D holds 40% of Project SPV1, 35% of Project SPV2, 50% of Land SPV, and 60% of Finance SPV. Each SPV has different external creditors (contractors, banks, homebuyers). D defaults. All four entities trigger insolvency. The NCLT orders group proceedings. A common RP is appointed.

The RP faces a problem: SPV1’s homebuyers are owed apartments. SPV2’s contractors are owed money. Finance SPV’s lenders are owed debt repayment. What distribution formula makes sense? If consolidated, do homebuyers in SPV1 get priority over contractors in SPV2? If segregated, each SPV’s unsecured homebuyers are wiped out while Finance SPV’s lenders recover.

Section 59A gives no answer. The joint CoC must decide. But the CoC is dominated by SPV1 and SPV2’s banks (who are also guarantors of D’s other loans). That creates a conflict.

Outcome: Contentious. Courts will need to develop fairness principles.

Scenario 3: The Financial Holding Group.

Holding Company H owns 30% of Operating Company O1, 25% of Operating Company O2, and 40% of Operating Company O3. Each operating company also has external shareholders. H has guaranteed loans for all three. When H defaults, O1, O2, and O3’s lenders (who are also H’s lenders) apply for group insolvency.

Problem: O1 and O2’s external shareholders were not parties to H’s guarantees. They did not consent to a consolidated proceeding. A group resolution plan that prioritizes H’s lenders over O1’s external equity is arguably a non-consensual reorganization.

Outcome: Legally risky. Courts may refuse to consolidate where non-group creditors’ rights are materially affected.

9. Statutory Interpretation: ‘Control’ and ‘Ownership’

Section 59A uses two terms: ‘in control of’ and ‘owning at least 26%.’ Are these the same or different?

Linguistically, ‘in control of’ is broader. You can control an entity through loan covenants without owning shares. You can control through management contracts. You can control through de facto dominance of the board.

But ‘owning at least 26%’ is a concrete threshold. It suggests the draftsman intended a bright-line rule, not a fact-intensive inquiry.

The IBBI rules should harmonize this. A reasonable interpretation: 26% ownership creates a presumption of control. Below 26%, control must be proven. Above 26%, the burden shifts to the entity to prove independence.

10. The Unfinished Business

Section 59A is permissive, not mandatory. That is both its strength and weakness. It allows flexibility, the NCLT can assess whether group proceedings serve justice in each case. But it also creates uncertainty. Some practitioners will push for group insolvency, others will resist, and courts will develop doctrine piecemeal.

Three areas require immediate rule-making:

First, joint CoC voting. A formula that weights creditors by total exposure across the group is fair but complex. A formula that treats each entity’s creditors as separate voting blocs is simpler but risks entity-specific majorities dominating others. The IBBI should propose a hybrid: entity-by-entity voting on entity-specific issues, consolidated voting on group-level issues.

Second, inter-company claims. If Entity A owes Entity B Rs. 50 crores, and Entity B is also insolvent, should that claim be subordinated or eliminated entirely? The statute is silent. Courts will need guidance on whether inter-company claims are even admissible in a joint CoC.

Third, exit from group proceedings. Once initiated, can a single group entity pursue standalone insolvency? The statute does not forbid it. But permitting it undermines the entire group framework. The IBBI should require high justifications for exit, materiality of the entity, fundamental divergence of interests, conflict of laws.

The SPV problem is no longer without a legal answer. But the answer is still incomplete.

ENDNOTES

1. Insolvency and Bankruptcy Code (Amendment) Act, 2023, s. 59A (Chapter VA).

2. Anuj Jain IRP v Axis Bank Ltd (2020) 8 SCC 401, established financial creditor status in subsidiary contexts.

3. Jaypee Kensington Boulevard Apartments Welfare Association v NBCC (India) Ltd (2022) 1 SCC 401, multi-entity complexity in real estate insolvency.

4. Bikram Chatterji v Union of India (Amrapali) (2022) 18 SCC 432, corporate veil piercing and group fraud.

5. Vidya Drolia v Durga Trading Corporation (2021) 2 SCC 1, in rem nature of insolvency proceedings.

6. The 26% threshold is consistent with SEBI’s definition of ‘promoter’ and the Listing Regulations 2015.

7. Inter-company claims subordination is not explicit in the Code and will depend on judicial interpretation under Section 59A group proceedings.

8. The IBBI’s Guidelines on Group Insolvency (if issued) will be critical to operationalizing Section 59A. As of this writing, guidelines are in consultation draft stage.

INFOGRAPHIC NOTE FOR DESIGN TEAM

Visual framework showing three group structures: (1) Wholly-Owned Subsidiary (Parent P → 100% → Sub S); (2) SPV-Heavy Developer (Dev D → 40% SPV1, 35% SPV2, 50% Land, 60% Finance); (3) Financial Holding (Holding H → 30% O1, 25% O2, 40% O3 + cross-guarantees). Color code by control threshold (green: 26%+; amber: <26%). Add a flowchart showing the decision tree: Is entity insolvent? Is there another group member owning/controlling 26%+? → Group proceedings initiated. Common Bench, Common RP, Joint CoC. Add a box for the three gaps: No Automatic Pooling, No Substantive Consolidation, Unclear CoC Voting.

Prashant Kumar Nair

Prashant Kumar Nair is an Advocate-on-Record at the Supreme Court of India. He practises across insolvency and restructuring, arbitration and dispute resolution, real estate and infrastructure, corporate and commercial law, taxation, intellectual property, regulatory and compliance, and capital markets law. He is a doctoral researcher at RGNUL focusing on the arbitration-insolvency interface. He is the founder of Corpus Lawyers. LinkedIn: linkedin.com/in/prashant-kumar-nair/