However, the stylesheet doesn't group and produces instead:
well it did group
<xsl:for-each-group select="*" group-adjacent="name()" >
but then you immediately unwound the grouping
<xsl:for-each select="current-group()">
you want to add the <sections> element once per group, not once per
item in the group, so
<?xml version="1.0" encoding="UTF-8"?>
<xsl:stylesheet version="2.0"
xmlns:xsl="http://www.w3.org/1999/XSL/Transform";>
<xsl:output method="xml" version="1.0" encoding="utf-8"
indent="yes" />
<xsl:template match="/">
<xsl:apply-templates/>
</xsl:template>
<xsl:template match='*[sect]'>
<xsl:for-each-group select="*" group-adjacent="name()" >
<xsl:choose>
<xsl:when test="current-grouping-key() = 'sect'">
<sections>
<xsl:apply-templates select='current-group()' mode='sect'/>
</sections>
</xsl:when>
<xsl:otherwise>
<xsl:apply-templates select='current-group()'/>
</xsl:otherwise>
</xsl:choose>
</xsl:for-each-group>
</xsl:template>
<xsl:template match='sect' mode='sect'>
<xsl:apply-templates/>
</xsl:template>
<xsl:template match='*'>
<xsl:copy>
<xsl:copy-of select="@*"/>
<xsl:apply-templates />
</xsl:copy>
</xsl:template>
</xsl:stylesheet>
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