Assets Of Subsidiary Can't Be Treated As Assets Of Holding Company In CIRP: NCLAT Sets Aside Order Directing Fresh Valuation Of Assets

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 ...

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

Tags