IBC | CIRP Of Holding Company Cannot Include Subsidiary's Assets: Supreme Court

The Supreme Court on Monday (July 23) held that a holding company is not the owner of its subsidiary's assets and thus, subsidiary assets cannot be included in the holding company's resolution plan.

A bench of Justice Abhay Oka and Justice Pankaj Mithal dismissed an appeal filed by a Successful Resolution Applicant of a Corporate Guarantor against NCLT's decision to admit Financial Creditor's application for recovery of balance amount from the Corporate Debtor.

The Corporate Debtor in this case was a subsidiary of the Corporate Guarantor.

“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...Therefore, the assets of the subsidiary company of the corporate debtor cannot be part of the resolution plan of the corporate debtor”, the court held.

Facts

Gujarat Hydrocarbon and Power SEZ Ltd. (corporate debtor) received a Rs. 100 crore loan from SREI Infrastructure Finance Ltd. (financial creditor) for a SEZ project, secured by a mortgage on leasehold land and a pledge of shares. M/s. Assam Company India Limited (ACIL) provided a corporate guarantee.

Following the corporate debtor's default, the financial creditor invoked ACIL's guarantee and filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). The application was admitted on October 26, 2017, initiating the Corporate Insolvency Resolution Process (CIRP) for ACIL. BRS Ventures, the Successful Resolution Applicant for ACIL, paid Rs. 38.87 crores in full and final settlement of the financial creditor's claim.

On February 10, 2020, the financial creditor filed another application under Section 7 of the IBC, this time against the corporate debtor, claiming Rs. 1428 crores as the balance payable. This application was admitted by the NCLT on November 18, 2020. The National Company Law Appellate Tribunal (NCLAT) dismissed the appeal filed by BRS Ventures, leading to the present appeal in the Supreme Court.

Arguments

The appellant argued that by paying Rs. 38.87 crores to the financial creditor, the appellant acquired subrogation rights under Section 140 of the Indian Contract Act, 1872. This subrogation entitled the appellant to step into the financial creditor's shoes, securing the rights over the corporate debtor's SEZ land mortgage. Appellant contended that even partial payment can trigger subrogation rights and argued that the business of the corporate debtor was included in the insolvency plan.

The financial creditor argued that the liability of the corporate debtor continued despite the payment by the appellant. It emphasized the distinct legal identities of ACIL and its subsidiary, the corporate debtor, arguing that the resolution process of ACIL did not affect the corporate debtor's obligations.

Liability of guarantor/surety

The Supreme Court highlighted that under Section 128 of the Contract Act, the liability of the surety is co-extensive with that of the principal debtor, allowing the creditor to seek repayment from either party without exhausting remedies against the other.

The court stated that a compromise between the creditor and the surety without the borrower's consent does not affect the borrower's liability.

In Lalit Kumar Jain vs IBBI (2021), it was held that the court noted that the contract between the creditor and the surety is independent; thus, the approval of a resolution plan in the CIRP of the principal borrower does not discharge the surety.

The same principle applies if the surety's resolution plan is approved; the surety is discharged by law, but the principal borrower's debt remains, the court held.

Section 31 of the IBC states that an approved resolution plan binds all parties, including creditors and guarantors.

“such a resolution plan of the corporate guarantor will not affect the liability of the principal borrower to repay the loan amount to the creditor after deducting the amount recovered from the corporate guarantor or the amount paid by the resolution applicant on behalf of the corporate guarantor as per the resolution plan”, the court concluded.

Simultaneous proceedings under IBC against the corporate debtor and guarantor

Under Section 60 sub-sections (2) and (3), the IBC allows financial creditors to initiate separate or simultaneous proceedings against both the corporate debtor and the guarantor, the court observed, highlighting that if insolvency proceedings for both are pending before different Adjudicating Authorities, they must be transferred to the NCLT handling the corporate debtor's case.

Assets of the corporate debtor in CIRP of corporate guarantor

The appellant argued that the corporate debtor's assets were part of ACIL's CIRP because ACIL's information memorandum mentioned SEZ projects involving the corporate debtor. NCLAT held that the assets of subsidiaries cannot be included in the holding company's resolution plan.

Sections 18 and 36 of the IBC exclude the assets of Indian subsidiaries from the liquidation estate, consistent with the principle that shareholders do not own company assets. Hence, the corporate debtor's assets were not part of ACIL's resolution plan, the court held.

Subrogation under Section 140 of the Contract Act

Section 140 grants a surety the right to recover from the principal debtor after paying the guaranteed debt. In this case, ACIL's liability was to repay the entire loan of the corporate debtor. The appellant paid Rs. 38.87 crores to the financial creditor on behalf of ACIL, extinguishing ACIL's liability but not the corporate debtor's, the court noted.

“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”, the court held.

Thus, the court upheld NCLAT's decision, and dismissed the appeal.

Senior Advocate Jaideep Gupta appeared for the Appellant

Advocate Abhimanyu Bhandari appeared for the financial creditor.

Senior Advocate Darius Khambata appeared for intervenor M/s. Zaveri & Co. Pvt. Ltd.

Case no. – Civil Appeal No. 4565 of 2021

Case Title – BRS Ventures Investments Ltd. v. SREI Infrastructure Finance Ltd. & Anr.