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

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