Recharacterization of Intra-Group Financial Instruments under the Insolvency and Bankruptcy Code, 2016: Towards an Identity of Interest Test

Abstract

The Insolvency and Bankruptcy Code, 2016 creates a sharp divide between financial creditors and equity holders, and that divide shapes the entire course of a company's insolvency. Financial creditors are given significant powers: they sit on the Committee of Creditors, vote on resolution plans, and recover their dues ahead of most other unsecured claimants in liquidation. Equity holders are placed at the very bottom of the recovery waterfall under Section 53, which in practice means that shareholders almost never recover anything once insolvency begins. This imbalance has encouraged controlling groups to recharacterize equity contributions as loans to subsidiaries, moving from the last position in recovery to one of the first. The Supreme Court has relied on the commercial effect of borrowing test to decide whether a transaction counts as financial debt, yet that test focuses only on the form of the transaction and does not ask whether the form was shaped by genuine negotiation or by strategic manipulation within a group. The 2025 Amendment Bill, enacted as the Insolvency and Bankruptcy Code (Amendment) Act, 2026, introduces group insolvency procedures but leaves this classification problem unresolved. This paper proposes an Identity of Interest Test, which examines the origin of the capital, governance behaviour, risk profile and the timing of recharacterization, and argues that the test should be added to Section 5(8) of the Code with the burden placed on the entity claiming financial creditor status.