The Hon’ble Supreme Court expounded that a holding company is not the owner of the assets of its subsidiary. Therefore, the assets of the subsidiaries cannot be included in the resolution plan of the holding company. Further, it was held that the financial creditor can always file separate applications under Section 7 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) against the corporate debtor and the corporate guarantor. The applications can be filed simultaneously as well.
Brief Facts:
The 2nd respondent i.e., corporate debtor approached the 1st respondent i.e., financial creditor, for a grant of a loan. Under the agreement, the financial creditor granted the corporate debtor a loan of Rs.100 crores for setting up a SEZ project. The loan granted by the financial creditor to the corporate debtor was secured by a mortgage made by the corporate debtor of its leasehold land and a pledge of shares of the corporate debtor and ACIL (subsidiary of Corporate Debtor).
An application was filed for recovery of loan before the Debt Recovery Tribunal. Thereafter, an application under Section 7 of the IBC was filed concerning ACIL as the guarantee was not honoured.
The appellant paid Rs.38.87 crores to the 1st respondent-financial creditor, against the admitted claim of Rs.241.27 crores in full and final settlement of all its dues and demands submitted in the resolution plan.
Another application under Section 7 was filed for balance amount. The application was admitted; hence an appeal was filed by the Appellant before NCLAT which was dismissed. M/s. Zaveri & Co. Pvt. Ltd. filed interim application for intervention stating in the application that the applicant and other interested parties had submitted the resolution plan of the 2nd respondent-corporate debtor. The resolution plan was approved and accordingly Applicant furnished bank guarantee.
Contentions of the Appellant:
It was contended that that the appellant has the right of subrogation over the right of the financial creditor over the principal borrower (corporate debtor) in respect of its dues as well as the security provided to the financial creditor of the mortgage in respect of SEZ land. Further, a partial payment made in the full and final settlement is sufficient to trigger the principle of subrogation.
It was urged that the 1st respondent financial creditor is now estopped from enforcing the remaining part of the debt from the 2nd respondent-corporate debtor in view of Section 63 read with Section 41 of the Contract Act.
Contentions of the Respondent:
It was argued that no payment was made against the claim raised by ACIL as it was an unsecured financial creditor primarily because the liquidation value of the 2nd respondent corporate debtor is much lower than the total claim amount of the secured financial creditors.
Further, under Section 36(4) of the IBC, the assets of the subsidiary of the corporate debtor cannot be included in the liquidation estate assets.
It was urged that merely because the creditor has made a partial recovery from the guarantor, it does not absolve the corporate debtor of his financial obligations.
Observations of the Court:
It was noted that the Appellant did not press the issue of subrogation before the NCLAT.
It was opined that the liability of the surety and the principal debtor is co-extensive. The creditor has remedies available to recover the amount payable by the principal borrower by proceeding against both or any of them. The creditor can proceed against the guarantor first without exhausting its remedies against the principal borrower.
It was observed that if the creditor recovers a part of the amount guaranteed by the surety from the surety and agrees not to proceed against the surety for the balance amount, that will not extinguish the remaining debt payable by the principal borrower. In such a case, the creditor can proceed against the principal borrower to recover the balance amount. Similarly, if there is a compromise or settlement between the creditor and the surety to which the principal borrower is not a consenting party, the liability of the borrower qua the creditor will remain unaffected. The provisions regarding the discharge of the surety discussed above show that involuntary acts of the principal borrower or creditor do not result in the discharge of surety.
The Bench opined that when the resolution plan is approved in CIRP of the surety, in such a case, the surety gets a discharge from his liability under the guarantee by operation of law or by involuntary process. It will not amount to the discharge of the principal borrower.
It was held that the IBC permits separate or simultaneous proceedings to be initiated under Section 7 by a financial creditor against the corporate debtor and the corporate guarantor.
As per facts of the present case, it was observed that as SEZ is stated to be a separate company, it is not included in the resolution plan, which was duly approved. As rightly found by the NCLAT, the resolution plan takes care only of the investments of ACIL in the subsidiaries and not the assets of subsidiaries. It was held that considering the scheme of the IBC, assets of a subsidiary company cannot be part of the resolution plan of the holding company.
Further, it was ruled that by virtue of the CIRP process of ACIL (corporate guarantor), the 2nd respondent-corporate debtor does not get a discharge, and its liability to repay the loan amount to the extent to which it is not recovered from the corporate guarantor is not extinguished.
The summary of rulings of the Court are:
- Payment of the sum of Rs.38.87 crores to the 1st respondent-financial creditor under the resolution plan of the corporate guarantor-ACIL will not extinguish the liability of the 2nd respondent principal borrower/corporate debtor to pay the entire amount payable under the loan transaction after deducting the amount paid on behalf of the corporate guarantor in terms of its resolution plan;
- A holding company is not the owner of the assets of its subsidiary. Therefore, the assets of the subsidiaries cannot be included in the resolution plan of the holding company;
- The financial creditor can always file separate applications under Section 7 of the IBC against the corporate debtor and the corporate guarantor. The applications can be filed simultaneously as well.
The decision of the Court:
Based on above findings, accordingly, the appeal was dismissed.
Case Title: BRS Ventures Investments Ltd. v. SREI Infrastructure Finance Ltd. & Anr.
Citation No.: 2024 Latest Caselaw 463 SC
Coram: Hon'ble Mr. Justice Abhay S. Oka, Hon’ble Mr. Justice Pankaj Mithal
Advocate for Appellant: Adv. Mr. Jaideep Gupta
Advocate for Respondent: Adv. Mr. Abhimanyu Bhandari
Advocate for Intervenors: Adv. Mr. Darius Khambata
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