The Supreme Court, in a recent case of BRS Ventures Investments Ltd v SREI Infrastructure Finance Ltd & Anr, has reiterated that assets of a subsidiary company cannot be part of the insolvency resolution plan of the holding company.

Brief Facts:

Gujarat Hydrocarbon & Power SEZ Ltd (“GHPSL”) is the corporate debtor and a subsidiary of Assam Company Indian Ltd (“ACIL”). SREI Infrastructure Finance Ltd (“SIFL”), being the financial creditor, had granted a loan of Rs 100 Crores for setting up of an SEZ project. The loan was secured by a corporate guarantee dated 5 January 2011 furnished by ACIL. Subsequently, a debt repayment and settlement agreement was entered into between GHPSL, SIFL and ACIL (as the guarantor). As GHPSL committed default, SIFL invoked the corporate guarantee of ACIL and initiated insolvency proceedings against ACIL. The Resolution Professional assessed claim of SIFL at Rs 241.27 Crores against ACIL. BRS Ventures Investments Ltd (“BVIL”) i.e. the Appellant submitted the resolution plan, which was approved by Committee of Creditors (“CoC”), NCLT and confirmed by NCLAT. As a result, BVIL made a payment of Rs 38.87 Crores to SIFL in full and final settlement of all dues and demands. Thereafter, SIFL initiated insolvency proceedings against GHPSL for the balance amount under the loan facility of Rs 100 Crores. When resolution plan in respect of GHPSL was approved by CoC. The same was challenged by BVIL before the Apex Court.

Contention of the Parties:

BVIL i.e. the Appellant inter alia contended that assets of GHPSL were part of Corporate Insolvency Resolution Proceedings (“CIRP”) in respect of ACIL. It was contended by BVIL that the entire project cost of GHPSL, including the land acquisition, was financed through equity and unsecured loans contributed by ACIL. As the information memorandum refers to this acquisition by ACIL under the caption “SEZ Business”, the assets of GHPSL form part of CIRP of ACIL and therefore cannot be further dealt with in CIRP in respect of GHPSL.

SIFL i.e. the financial creditor contended that assets of the subsidiary company cannot be included in liquidation estate assets. Relying upon section 18 of the Insolvency Bankruptcy Code (“IBC”), it was submitted that assets of the subsidiaries cannot be included in the resolution process as subsidiary companies and holding company are separate legal entities, and, therefore, the holding company does not own assets of the subsidiary company.

Held:

After considering rival submissions, the Apex Court recorded a finding that the resolution plan for ACIL takes care of only the investment of ACIL in the subsidiaries and not the assets of the subsidiaries. It placed reliance upon (a) Explanation to section 18 (Duties of the interim resolution professional) of the IBC, which clearly states that the term “assets” will not include assets of any subsidiary of the corporate debtor, and (b) section 36(4) (Liquidation Estates), which states that assets of the subsidiary will not be included in the liquidation estate assets and shall not be used for recovery in the liquidation. As a result, objection of the Appellant i.e. BVIL was outrightly rejected.

MHCO Comment:

The view taken by the Supreme Court will ensure that subsidiary companies and holding company are treated as separate legal entities. Also, the assets of the subsidiary company will not in any way be included in the insolvency process of a holding company. This reiteration by the Apex Court will consolidate confidence amongst the shareholders of the subsidiary companies. At the same time, insolvency of the holding company will not adversely affect functioning of the subsidiaries as their assets will remain unaffected.

This update was released on 23 Aug 2024.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

Legal Update Team
MANSUKHLAL HIRALAL & COMPANY
Advocates, Solicitors and Notaries
T: +91 22 40565252
Mumbai Office: Surya Mahal, 2nd Floor, 5, Burjorji Bharucha Marg, Fort, Mumbai-400 023, India
Delhi Office: Block C-9, Lower Ground Floor, Jangpura Extension, New Delhi - 110 014, India
www.mhcolaw.com

"Noted lawyer in the Real Estate practitioner from India" - Chambers & Partners

Please consider the environment before printing this email

The information contained in this communication is intended solely for the use of the individual or entity to whom it is addressed and others authorized to receive it. This communication may contain confidential or legally privileged information. If you are not the intended recipient, any disclosure, copying, distribution or action taken relying on the contents is prohibited and may be unlawful. If you have received this communication in error, or if you or your employer does not consent to email messages of this kind, please notify the sender immediately by responding to this email and then delete it from your system. No liability is accepted for any harm that may be caused to your systems or data by this message.