2025 (1) TMI 1266 - AT - IBC

Subsidiary company assets remain legally distinct from holding company assets during insolvency proceedings under IBC

State Bank of India, Singapore Branch Versus Shantanu Prakash, Mahendar Singh Khandelwal Resolution Professional, Edu comp Solution Limited, Committee of Creditors Edu comp Solutions Limited, State Bank of India

NCLAT held that subsidiary company assets are legally distinct from holding company assets in insolvency proceedings. The Adjudicating Authority correctly ... Fresh valuation of shares of The Learning Internet Inc. held by EAPPL ordered by the Adjudicating Authority - scope of the Adjudicating Authority in directing fresh valuation - assets of the subsidiary company are different from the assets of the holding company or not - preservation of values of shares of EAPPL by Resolution Professional - No reasoning for under valuation has been recorded - three valuation reports quoted by the Respondent No. 1 to justify the revaluation. Whether the Adjudicating Authority could have passed the directions to the Respondent No 2 to approach the IBBI for appointment of valuers for valuation of shares The Learning Internet Inc. based on the alleged under valuation of shares by the Respondent No. 1? HELD THAT:- The Adjudicating Authority has rightly held that in terms of the Code and the Regulation, the Corporate Debtor and its subsidiary are two legally distinct entities. It has also been correctly held that the assets of the subsidiary company cannot be treated as part of the assets of the Corporate Debtor. The Adjudicating Authority further rightly held that it is not the duty of the Respondent No. 2 to preserve the assets of the subsidiary company which are not under control of the Corporate Debtor or which are not part of estate of the Corporate Debtor. The Adjudicating Authority has also not found anything wrong in the selling of the shares of The Learning Internet Inc. - However, the Adjudicating Authority has held that the Respondent No. 1 being the corporate guarantor of the principal borrower i.e., EAPPL (subsidiary of the Corporate Debtor) has right to protect its interest in corporate guarantee and therefore the Respondent No. 1 can take certain step to protect himself to reduce risk of standing as guarantor to EAPPL. The Respondent No. 1 aggrieved due to alleged under valuation shares of The Learning Internet Inc., could have approached the liquidators or could have invoked the suitable jurisdiction, if any, in accordance with the relevant insolvency law of the Singapore before the High Court of Singapore, which he has not done as confirmed by the Respondent No. 1 in reply put by this Appellate Tribunal to Respondent No. 1 during the pleadings - it does not give any right to the Respondent No. 1 to approach the Adjudicating Authority on this issue and without any doubt, the Adjudicating Authority did not has any jurisdiction to give such directions w.r.t. fresh valuation in this regard as contained in Para 27 of the Impugned Order. The valuations were done at different time periods and in different context on different issues and we are, therefore, of opinion that such valuation reports could not have been relied upon by the Adjudicating Authority. In any case such valuation reports were done long back in 2008 and 2014-2021 which would have been conducted based on the estimates and future projections relevant at that times and cannot be relied upon now. Regulation 21A of the Liquidation Regulations has no applicability in the present Company Petition which is for insolvency proceeding of the Corporate Debtor. Conclusion - The assets of a subsidiary cannot be treated as assets of the holding company in insolvency proceedings. The moratorium under the IBC applies only to the assets of the Corporate Debtor. The NCLT's directive for a fresh valuation of shares set aside, stating that it was beyond the scope of its jurisdiction. The impugned order set aside - appeal allowed. The judgment addresses several core legal issues arising from an appeal filed by the State Bank of India, Singapore Branch, against an order by the National Company Law Tribunal (NCLT) concerning the insolvency proceedings of Educomp Solutions Limited (Corporate Debtor). The appeal primarily contests the NCLT's directive for a fresh valuation of shares of The Learning Internet Inc., held by Educomp Asia Pacific Pte. Ltd. (EAPPL), a subsidiary of the Corporate Debtor.Issues Presented and Considered:The core legal issues considered include:(i) Whether the shares held by EAPPL, a subsidiary of the Corporate Debtor, can be treated as assets of the Corporate Debtor.(ii) Whether the plea of undervaluation of shares is tenable under the Insolvency and Bankruptcy Code (IBC).(iii) Whether the moratorium under Section 14 of the IBC applies to the shares held by EAPPL.(iv) Whether the Corporate Debtor, as a guarantor, can question the valuation and sale price of the pledged shares.Issue-Wise Detailed Analysis:Relevant Legal Framework and Precedents:The legal framework involves provisions of the Insolvency and Bankruptcy Code, 2016, specifically Sections 18, 45, 47, and 60(5), and the Indian Contract Act, 1872, particularly Sections 128 and 141. The SARFAESI Act is also referenced in relation to the rights of guarantors.Court's Interpretation and Reasoning:The Tribunal affirmed that the assets of a subsidiary company are distinct from those of the holding company, and thus, the shares of The Learning Internet Inc. held by EAPPL cannot be treated as assets of the Corporate Debtor. The Tribunal reasoned that the Resolution Professional (RP) is not obligated to preserve the value of assets not owned by the Corporate Debtor.Key Evidence and Findings:The Tribunal noted that EAPPL, a subsidiary of the Corporate Debtor, had pledged shares of The Learning Internet Inc. with the Appellant as collateral for a loan. The shares were sold during EAPPL's liquidation proceedings in Singapore, with the liquidators' consent, for USD 7.1 million.Application of Law to Facts:The Tribunal applied the provisions of the IBC and the Indian Contract Act to conclude that the Corporate Debtor cannot claim rights over the assets of its subsidiary. It also held that the moratorium under Section 14 of the IBC does not apply to assets not owned by the Corporate Debtor.Treatment of Competing Arguments:The Appellant argued that the NCLT's directive for a fresh valuation was beyond its jurisdiction and not supported by the IBC. The Respondent No. 1 contended that the undervaluation of shares harmed the creditors' interests and that a fresh valuation was necessary for fair treatment of stakeholders.Conclusions:The Tribunal concluded that the NCLT's directive for a fresh valuation was unwarranted, as the shares were not assets of the Corporate Debtor and the sale was conducted with the liquidators' consent in accordance with Singaporean law.Significant Holdings:The Tribunal held that the assets of a subsidiary cannot be treated as assets of the holding company in insolvency proceedings. It emphasized that the moratorium under the IBC applies only to the assets of the Corporate Debtor. The Tribunal also noted that the NCLT lacked jurisdiction to order a fresh valuation of shares sold during the liquidation proceedings of a subsidiary under foreign jurisdiction.The Tribunal set aside the NCLT's directive for a fresh valuation of shares, stating that it was beyond the scope of its jurisdiction. It upheld the principle that the assets of a subsidiary are distinct from those of the holding company and are not subject to the insolvency proceedings of the latter.The judgment reinforces the legal distinction between holding and subsidiary companies in insolvency proceedings and clarifies the non-applicability of the IBC's moratorium to assets not owned by the Corporate Debtor. The Tribunal's decision underscores the importance of jurisdictional boundaries in cross-border insolvency matters.