The Supreme Court ruled that the subsidiary assets can’t be included in the holding company’s resolution plan under Insolvency & Bankruptcy Code (IBC).
The Apex court noted that the appellant has not seriously pressed the issue of the bar of limitation in this appeal. The NCLAT rendered the findings on both issues in favour of the respondents. There is no dispute that the 1st respondent financial creditor had granted a loan of Rs.100 crores to the 2nd respondent corporate debtor. The loan was secured by the corporate guarantee furnished by ACIL, which is the holding company of the corporate debtor.
The court further noted that the guarantee was invoked by the 1st respondent-financial creditor, which led to the filing of an application under Section 7 of the IBC against ACIL. The CIRP of ACIL was completed, and the resolution plan was approved. The claim lodged by the 1st respondent-financial creditor was of Rs.241.27 crores.
The court said that however, as per the resolution plan, the 1st respondent-financial creditor had to accept a haircut as it was provided therein that the 1st respondent-financial creditor would get only a sum of Rs.38.87 crores from the resolution applicant.
The court stated that 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.
The bench observed that section 128 of the Contract Act lays down the fundamental principle that the liability of the surety is co-extensive with that of the principal debtor unless otherwise provided by the contract.
“Where a company furnishes a corporate guarantee for securing a loan taken by another company and if the CIRP of the corporate guarantor ends in a resolution plan, it will bind the creditor of the corporate guarantor. The corporate guarantor’s liability may end in such a case by operation of law. However, such a resolution plan of the corporate guarantor will not affect the liability of the principal borrower to repay the loan amount to the creditor after deducting the amount recovered from the corporate guarantor or the amount paid by the resolution applicant on behalf of the corporate guarantor as per the resolution plan”, the court said.
While reading section 60 of the IBC the court observed that the liability of the guarantor or surety is a financial debt, and even the money borrowed against the payment of interest is also a financial debt.
The bench held that consistent with the basic principles of the Contract Act that the liability of the principal borrower and surety is co-extensive, 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.
The court observed that the resolution plan takes care only of the investments of ACIL in the subsidiaries and not the assets of subsidiaries.
Considering the scheme of the IBC, the court stated that the assets of a subsidiary company cannot be part of the resolution plan of the holding company.
It was further added by the court that the assets of the subsidiary company of the corporate debtor cannot be part of the resolution plan of the corporate debtor.
The bench said that notwithstanding the subrogation to the extent of the amount paid on behalf of the corporate guarantor by the resolution applicant, the right of the financial creditor to recover the balance debt payable by the corporate debtor is in no way extinguished.
The court concluded that 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.
It was further held by the court 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.
The bench directed that 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.
Issue Raised
- Whether the application under Section 7 of IBC is barred by limitation?
- Whether the second Application under Section 7 of IBC is not maintainable against the Corporate Debtor as for the same debt and default, CIRP has already been taken place against the Corporate Guarantor and the Financial Creditor has accepted the amount in full and final settlement of all its dues?”
Facts
The 2nd respondent–Gujarat Hydrocarbon and Power SEZ Limited, is a corporate debtor.
The corporate debtor approached the 1st respondent–SREI Infrastructure Finance Limited (the 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 corporate debtor is a subsidiary of M/s. Assam Company India Limited (ACIL).
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.
The loan was also secured by the corporate guarantee furnished by ACIL.
On account of the default committed by the corporate debtor, the financial creditor invoked the corporate guarantee of ACIL.
Case Information
Case Name : BRS Ventures Investments Ltd. v/s SREI Infrastructure Finance Ltd. & Anr.
Judicial Level & Location : Supreme Court of India
Appeal Number :CIVIL APPEAL NO. 4565 OF 2021
Date of Ruling : 2024-07-23
Ruling in favour of: Respondent
Judges: Justice Abhay S. Oka and Justice Pankaj Mithal
