Supreme Court Holds Corporate Veil May Be Lifted During CIRP Where Group Companies Function as a Single Economic Entity.

In a significant judgment in Civil Appeal No. 1526 of 2023 titled Alpha Corp Development Private Limited versus Greater Noida Industrial Development Authority & Ors., strengthening the objectives of the Insolvency and Bankruptcy Code, 2016 (“IBC”), the Hon’ble Supreme Court held that the corporate veil may be lifted during the Corporate Insolvency Resolution Process (“CIRP”) where a holding company and its subsidiaries operate as an integrated enterprise. The ruling is aimed at safeguarding the interests of homebuyers and ensuring the completion of stalled real estate projects.

The case arose from the insolvency of Earth Infrastructures Limited (“EIL”), a real estate developer whose housing projects across the NCR region had remained incomplete. Although the leasehold rights from Greater Noida Industrial Development Authority (“GNIDA”) over the three project lands were vested in EIL’s subsidiary companies, EIL was the principal developer exercising effective control over the projects and held substantial or complete shareholding in the subsidiaries.

Following the admission of EIL into the CIRP by the NCLT, the NCLT approved the resolution plans submitted by the two resolution applicants covering all three projects. GNIDA challenged these approvals before the National Company Law Appellate Tribunal (“NCLAT”), which set them aside on the ground that the assets of the subsidiary companies could not be treated as assets of EIL during its CIRP, and, consequently, the resolution plans could not validly deal with lands leased to entities other than the Corporate Debtor. The Successful Resolution Applicants challenged this decision of the NCLAT before the Hon’ble Supreme Court.

Allowing the appeals, the Hon’ble Supreme Court observed that where group companies are so inextricably connected that they effectively function as a single economic entity, the corporate veil may be lifted. The Hon’ble Supreme Court noted that EIL was the “main driving force” behind the projects and that the subsidiary companies were merely a front for implementing the development. Accordingly, it was held that the assets of the subsidiaries could be considered as part of the resolution process to facilitate effective resolution.

The Hon’ble Supreme Court restored the resolution plans approved by the NCLT, enabling the Successful Resolution Applicants to proceed with the completion of the stalled housing projects while also protecting the interests of the GNIDA.

The judgment marks an important development in insolvency jurisprudence by reaffirming that courts may look beyond the formal corporate structure where it frustrates the objectives of IBC. Recognising that the holding company and its subsidiaries functioned as a single economic enterprise, the Hon’ble Supreme Court adopted a substance-over-form approach to facilitate the completion of stalled projects and protect the interests of homebuyers.