Assets Of Subsidiary Can't Be Treated As Assets Of Holding Company In CIRP: NCLAT Sets Aside Order Directing Fresh Valuation Of Assets
Tazeen Ahmed
29 Jan 2025 5:43 AM
The National Company Law Appellate Tribunal (NCLAT) New Delhi bench comprising Justice Rakesh Kumar Jain (Judicial Member) and Mr. Naresh Salecha (Technical Member) has observed that the assets of a subsidiary company cannot be treated as part of the assets of its holding company in a Corporate Insolvency Resolution Process (CIRP). The Tribunal held that the Adjudicating Authority does...
The National Company Law Appellate Tribunal (NCLAT) New Delhi bench comprising Justice Rakesh Kumar Jain (Judicial Member) and Mr. Naresh Salecha (Technical Member) has observed that the assets of a subsidiary company cannot be treated as part of the assets of its holding company in a Corporate Insolvency Resolution Process (CIRP). The Tribunal held that the Adjudicating Authority does not have the jurisdiction to direct fresh valuation of such assets when they are owned by the subsidiary and not the Corporate Debtor.
The Tribunal noted that since the subsidiary was in liquidation under laws of Singapore, the courts at Singapore alone would have jurisdiction to adjudicate issues regarding its assets, including the sale of shares.
Background Facts
Educomp Asia Pacific Pte. Ltd. (EAPPL), a wholly-owned subsidiary of Educomp Solutions Limited (Corporate Debtor), obtained loan facilities from State Bank of India, Singapore Branch (Appellant) amounting to USD 20 million on 16.05.2008. The Corporate Debtor executed a Deed of Guarantee in favour of the Appellant to secure the Loan Facility. EAPPL pledged 18,173 unlisted shares (51% stake) of The Learning Internet Inc. as collateral through a Stock Pledge Agreement dated 23.07.2008.
In the interregnum, the Corporate Debtor entered into the Corporate Insolvency Resolution Process (CIRP) by an order dated 30.05.2017 under Section 10 of the Insolvency & Bankruptcy code.
On 30.06.2017, EAPPL was ordered into liquidation by the High Court of Singapore. The shares of The Learning Internet Inc. were sold through an agreement dated 03.09.2021 for a price of USD 7.10 million.
Through the Impugned Order dated 25.08.2023, the Adjudicating Authority acknowledged that the assets of a subsidiary company differ from those of its holding company, clarifying that shareholders do not acquire an interest in the assets of the company. It was held that the shares of The Learning Internet Inc. do not constitute part of the assets of the Corporate Debtor. However, the Adjudicating Authority directed the Respondent No. 2 (Resolution Professional) for fresh valuation of shares.
The Appellant filed the appeal under Section 61(1) of the Code, challenging the Impugned Order.
Submissions
Appellant's Submissions
- There was no pleading or prayer made from either of the parties giving effect to valuation of shares that could lead to such directions from the Adjudicating Authority.
- Regulation 21 A Liquidation Regulations was not applicable to the case, which was not even a case of liquidation.
- The shares of The Learning Internet Inc. do not belong to or are owned by the Corporate Debtor as the shares were owned by EAPPL. The Resolution Professional, as per the Explanation (b) of Section 18 of the Code has no right to take control of the assets of EAPPL.
- The Liquidation order has been adjudicated per the laws of Singapore and therefore the entire Liquidation Process falls outside the scope of jurisdiction of the Adjudicating Authority.
- As per section 14 of the code, moratorium applies to transfer, encumbrance, and alienation, disposal “by the corporate debtor and any of its assets”. However, pledged shares of The Learning Internet Inc. are neither assets of Corporate Debtor, nor any sale thereof has been conducted by the Corporate Debtor. Therefore, the rigors of Section 14 do not apply to the said sale.
Respondent No. 1's Submissions
- The shares of The Learning Internet Inc. are contingent property of the Corporate Debtor under Section 3(27) of the Code. Consequently, the Resolution Professional is obligated to protect all assets of the Corporate Debtor, including these contingent assets.
- Section 47 of the Code addresses undervalued transactions and grants the right to a creditor or partner of the Corporate Debtor to report such transactions to the Adjudicating Authority. However, the Code does not permit an undervalued transaction or asset sale to be executed at the behest of a creditor; it specifically allows for such transactions to be conducted by the Corporate Debtor itself.
Respondent No. 2 / Resolution Professional's Submissions
- Section 18(f) of the Code lays down the duty of the Resolution Professional to take control and custody of the assets owned by the Corporate Debtor. Explanation (b) to Section 18 expressly excludes assets of a subsidiary, Indian or foreign, from its purview.
- Since the shares held by Educomp Asia in The Learning Internet Inc. are assets of Educomp Asia and not of the Corporate Debtor, the Resolution Professional cannot take custody and control over such shares.
- Similarly, in terms of Section 36(4) of the code, the assets of any subsidiary of a Corporate Debtor are not to be considered as the assets of the Corporate Debtor and consequently, not to be included within the liquidation estate of the Corporate Debtor. Therefore, the Respondent No.2 has no obligation to preserve such assets which fall outside the purview of Section 18(f) of the code.
- For invocation of Section 45 or Section 47 of the Code and to declare any transaction as undervalued, it must be shown that the Corporate Debtor entered into a transaction which involves the transfer of assets by the Corporate Debtor at a lower value. Admittedly, the sale of shares took place between EAPPL and the Appellant, and not by the Corporate Debtor.
- Moratorium is inapplicable in respect of the shares held by EAPPL as the shares are not an asset of the Corporate Debtor.
Observations
The issue before the Tribunal was whether the Adjudicating Authority could have directed Respondent No 2 to approach the IBBI for appointment of valuers for valuation of shares of The Learning Internet Inc. based on the alleged undervaluation of shares by the Respondent No. 1.
The Tribunal opined that the Adjudicating Authority rightly held that the Corporate Debtor and its subsidiary are two legally distinct entities, and that the assets of the subsidiary company cannot be treated as part of the assets of the Corporate Debtor.
The Tribunal noted that the order on liquidation on EAPPL was passed by the High Court of Singapore. Therefore, any issue regarding the liquidation proceedings including sale value of the shares in The Learning Internet Inc. sold by the Appellant with the consent of the liquidators of EAPPL could have been raised in liquidation proceedings of EAPPL before the High Court of Singapore as the assets in question were owned by EAPPL and not by the Corporate Debtor. The Tribunal held that the Adjudicating Authority did not have any jurisdiction to give such directions w.r.t. fresh valuation.
Further, the Tribunal observed that the case concerned CIRP of the Corporate Debtor and not the liquidation and therefore, Regulation 21 A of the Liquidation Regulations would not be applicable.
The Tribunal referred to the judgment of the Supreme Court in Greater Noida Industrial Development Authority (GNIDA) v. Roma Unicon Designex Consortium, where it was observed:
“Section 18, sub-section (1), Explanation further clarifies the law when it says that assets shall include the assets, meaning thereby assets of the Corporate Debtor shall not include assets of any Indian subsidiary. … The natural corollary to the above provision is that the assets of the subsidiary Company cannot be dealt with, in CIRP of a holding Company. Holding Company and subsidiary Company have separate legal status and the assets of subsidiary Company cannot be taken into consideration.”
The Tribunal set aside the impugned order to the extent it stated, “The secured financial claim of the State Bank of India (Singapore) qua the CD would be subject to the outcome of the valuation result/report”. The remaining impugned order was upheld.
Case Title: State Bank of India, Singapore Branch vs. Shantanu Prakash & Ors.
Case Number: Comp. App. (AT) (Ins) No. 1351 of 2023 & I.A. No. 4802, 4803, 4804, 4805, 6007 of 2023
For Appellants: Mr. Ankur Mittal & Ms. Yashika Sharma, Advocates.
For Respondents: Mr. Sunil Fernandes, Sr. Advocate along with Mr. Malak Bhatt, Ms. Rajshree Chaudhary, Ms, Diksha Dadu & Ms. Somya Saxena, for R-1(Shantanu Prakash).
Mr. Abhishek Sharma, Kritya Sinha, Ms. Shruti Poddar, for R-2(Mahendar Singh Khandelwal, Resolution Professional, Educomp Solution Limited).
Ms. Moulshree Shukla & Ms. Gayathri, for R-3 (Committee of Creditors, Educomp Solutions Limited).
Mr. Ashim Sood & Mr. Aditya Vardhan Sharma, Applicant in IA No. 6007 of 2023.
Date of Judgment: 23.01.2025