IBC| Assets Of Subsidiary Company Cannot Be Part Of Resolution Plan Of Holding Company: Supreme Court

The Supreme Court held that the holding company is not the owner of assets of the subsidiary company and hence, the assets of subsidiary company cannot be part of the resolution plan of the holding one.

The Court held thus in a civil appeal preferred by a company against the corporate debtor and financial creditor.

The two-Judge Bench of Justice Abhay S. Oka and Justice Pankaj Mithal observed, “A holding company and its subsidiary are always distinct legal entities. The holding company would own shares of the subsidiary company. That does not make the holding company the owner of the subsidiary's assets. In the case of Vodafone International Holdings BV, this Court took the view that if a subsidiary company is wound up, its assets do not belong to the holding company but to the liquidator. As mentioned in the decision, the reason is that a company is a separate legal persona and the fact that the parent company owns all its share has nothing to do with its separate legal existence. Therefore, the assets of the subsidiary company of the corporate debtor cannot be part of the resolution plan of the corporate debtor.”

Senior Advocate Jaideep Gupta appeared for the appellant while Advocate Abhimanyu Bhandari appeared for the respondents. Senior Advocate Darius Khambata appeared for the intervenor.

In this case, the second respondent was the corporate debtor and the same approached the first respondent i.e., the financial creditor for a grant of a loan. Under an agreement, the financial creditor granted the corporate debtor a loan of Rs. 100 crores for setting up a SEZ project. The corporate debtor was a subsidiary of M/s. Assam Company India Limited (ACIL) and the loan granted by the financial creditor to the corporate debtor was secured by a mortgage made by the corporate debtor of its leasehold land and a pledge of shares of the corporate debtor and ACIL. The loan was also secured by the corporate guarantee furnished by ACIL and the financial creditor filed an original application before the Debt Recovery Tribunal (DRT) to recover the outstanding loan amount.

Thereafter, a ‘debt repayment and settlement agreement’ was executed to which the financial creditor, the corporate debtor, and ACIL were parties. On account of default committed by the corporate debtor, the financial creditor invoked corporate guarantee of ACIL. Then an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) was filed concerning ACIL as the guarantee was not honoured. The adjudicating authority admitted the application and thus, the Corporate Insolvency Resolution Process (CIRP) of ACIL commenced. The appellant submitted a resolution plan and the same was approved by the Committee of Creditors (COC). The order of adjudicating authority was confirmed in appeal by the National Company Law Appellate Tribunal (NCLAT) and the same was challenged before the Supreme Court.

The Apex Court in view of the facts and circumstances of the case noted, “There is a mandate of clause (d) of sub-section (4) of Section 36 of the IBC that the assets of an Indian subsidiary of the corporate debtor shall not be included in the liquidation estate assets and shall not be used for the recovery in liquidation. Section 18 entrusts several duties to the IRPs concerning the corporate debtor's assets. Consistent with the provisions of Section 36(4)(d), the explanation (b) to Section 18(1) provides that the term ‘assets’ used in Section 18 shall not include the assets of any Indian subsidiary of the corporate debtor. Perhaps the reason for including these two provisions is that it is well-settled that a shareholder has no interest in the company's assets.”

The Court said that by virtue of the CIRP process of ACIL (corporate guarantor), the corporate debtor does not get a discharge, and its liability to repay the loan amount to the extent to which it is not recovered from the corporate guarantor is not extinguished.

“The words used in Section 140 are “upon payment or performance of all that he is liable for”. When the principal debtor commits a default and when the liability under the deed of guarantee of the surety is not limited to a particular amount, its liability is in respect of the entire amount repayable by the principal debtor to the creditor. The words ‘all that he is liable’ used under Section 140 cannot be ignored. The principal borrower must continuously indemnify the surety. Section 140 of the Contract Act may be founded on the said obligation”, it emphasised.

The Court added that if the surety pays the entirety of the amount payable under guarantee to the creditor, Section 140 of the Indian Contract Act, 1872 provides a remedy to the surety to recover the entire amount paid by him in the discharge of his obligations and therefore, the surety gets invested with the rights of the creditor to recover from the principal debtor the amount which was paid as per the guarantee. It further said that if the surety pays only a part of the amount payable to the creditor, the equitable right the surety gets under Section 140 will be confined to the debt he cleared.

“By the involuntary act of the creditor of accepting part of the amount from the surety in the discharge of the entire liability of the surety, even if Section 140 is attracted, it will confer on the guarantor or the appellant the right to recover only the amount mentioned above from the corporate debtor. The subrogation will be only to the extent of the amount recovered by the creditor from the surety. Notwithstanding the subrogation to the extent of the amount paid on behalf of the corporate guarantor by the resolution applicant, the right of the financial creditor to recover the balance debt payable by the corporate debtor is in no way extinguished”, it clarified.

Therefore, the Court came to the following conclusions –

• Payment of the sum of Rs. 38.87 crores to the 1st respondent-financial creditor under the resolution plan of the corporate guarantor-ACIL will not extinguish the liability of the 2nd respondent principal borrower/corporate debtor to pay the entire amount payable under the loan transaction after deducting the amount paid on behalf of the corporate guarantor in terms of its resolution plan.

• A holding company is not the owner of the assets of its subsidiary. Therefore, the assets of the subsidiaries cannot be included in the resolution plan of the holding company.

• The financial creditor can always file separate applications under Section 7 of the IBC against the corporate debtor and the corporate guarantor. The applications can be filed simultaneously as well.

Accordingly, the Supreme Court dismissed the appeal.

Cause Title- BRS Ventures Investments Ltd. v. SREI Infrastructure Finance Ltd. & Anr. (Neutral Citation: 2024 INSC 548)

Appearance:

Appellant: Senior Advocate Jaideep Gupta, Advocate Ajay Gaggar, AOR Amarjit Singh Bedi, and Advocate Shridhar Gaggar.

Respondents: Advocates Abhimanyu Bhandari, Arav Pandit, Thakur Ankit Singh, AORs Rooh-e-hina Dua, Shamik Shirishbhai Sanjanwala, Advocates Raheel Patel, Prabhakar Yadav, Abhishek Jamalpur, and AOR Vinam Gupta.

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