In a recent judgment, the Supreme Court clarified the legal distinction between holding companies and their subsidiaries regarding asset ownership during insolvency proceedings. The Court ruled that a holding company does not own the assets of its subsidiary, and thus, these assets cannot be included in the holding company's resolution plan under the Insolvency and Bankruptcy Code, 2016 (IBC). This ruling came in the context of a civil appeal involving a corporate debtor, a financial creditor, and a holding company, highlighting the critical nuances of corporate guarantees and the scope of liabilities within insolvency resolutions.
In this case, the corporate debtor, a subsidiary of M/s. Assam Company India Limited (ACIL), secured a Rs.100 crore loan from the financial creditor for developing an SEZ project by mortgaging its leasehold land and pledging shares. ACIL also provided a corporate guarantee. After the debtor defaulted, the creditor invoked ACIL's guarantee and filed an application under Section 7 of the Insolvency and Bankruptcy Code (IBC) when the guarantee wasn't honored. This led to the initiation of the Corporate Insolvency Resolution Process (CIRP) for ACIL. The resolution plan was approved by the Committee of Creditors (COC) and upheld by the National Company Law Appellate Tribunal (NCLAT), and the decision was later challenged before the Supreme Court.
The Apex Court observed that Clause (d) of Section 36(4) of the IBC mandates that the assets of an Indian subsidiary of the corporate debtor cannot be included in the liquidation estate or used for recovery in liquidation. This principle is supported by Section 18, which excludes the subsidiary’s assets from those of the corporate debtor. The Court held that the CIRP of ACIL, as the corporate guarantor, does not discharge the corporate debtor from its obligation to repay the loan. Additionally, under Section 140 of the Indian Contract Act, 1872, if a surety pays the debt, they have the right to recover the entire sum from the principal debtor, only the portion they paid if it was partial.
The Hon’ble Court thus concluded that a holding company does not own the assets of its subsidiary, so its assets cannot be included in the holding company's resolution plan. However, the financial creditor can file separate or simultaneous applications under Section 7 of the IBC against both the corporate debtor and the corporate guarantor.
BRS Ventures Investments Ltd. v. SREI Infrastructure Finance Ltd. & Anr.
2024 INSC 548
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