The Supreme Court has ruled that a holding company does not own its subsidiary’s assets, and therefore, these assets cannot be included in the holding company’s resolution plan.
The appeal challenged the National Company Law Tribunal‘s ( NCLT ) decision to accept a Financial Creditor’s application for recovering the remaining balance from the Corporate Debtor, a subsidiary of the Corporate Guarantor.
In the case at hand, Gujarat Hydrocarbon and Power SEZ Ltd. ( the corporate debtor ) had taken a Rs. 100 crore loan from SREI Infrastructure Finance Ltd. ( the financial creditor ) for a SEZ project, with the loan secured by a mortgage on leasehold land and a pledge of shares. Assam Company India Limited ( ACIL ) provided a corporate guarantee. After the corporate debtor defaulted, the financial creditor invoked ACIL’s guarantee and initiated proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC), leading to the Corporate Insolvency Resolution Process ( CIRP ) for ACIL. BRS Ventures, the Successful Resolution Applicant for ACIL, paid Rs. 38.87 crores as full and final settlement.
The financial creditor subsequently filed another application under the IBC against the corporate debtor for the remaining Rs. 1428 crores, which the NCLT admitted. The National Company Law Appellate Tribunal ( NCLAT ) upheld this decision, prompting the appeal to the Supreme Court.
The appellant argued that by paying Rs. 38.87 crores, they had acquired subrogation rights under Section 140 of the Indian Contract Act, 1872, allowing them to step into the financial creditor’s position. They contended that partial payment could trigger these rights and included the corporate debtor’s business in the insolvency plan.
The Supreme Court highlighted the principle under Section 128 of the Contract Act that the liability of the surety ( guarantor ) is co-extensive with that of the principal debtor. The creditor can seek repayment from either party without first exhausting remedies against the other. The court reiterated that a resolution plan for the corporate guarantor does not affect the principal debtor’s obligation to repay the loan.
The decision was made by a two-judge Supreme Court bench comprising Justice Abhay Oka and Justice Pankaj Mithal, who dismissed an appeal by a Successful Resolution Applicant of a Corporate Guarantor.
The court emphasised that holding companies and their subsidiaries are distinct legal entities. Consequently, while a holding company owns shares in its subsidiary, it does not own the subsidiary’s assets. This principle underpinned the court’s decision that the subsidiary’s assets could not be included in the resolution plan for the holding company.
Moreover, the IBC allows financial creditors to initiate separate or simultaneous proceedings against both the corporate debtor and the guarantor. The court noted that the assets of subsidiaries cannot be part of the holding company’s resolution plan, as shareholders do not own company assets. Thus, the corporate debtor’s assets were not included in ACIL’s resolution plan.
The Supreme Court also concluded that the financial creditor’s right to recover the balance debt from the corporate debtor remains unaffected, upholding the NCLAT’s decision and dismissing the appeal.
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