Does Assets of Subsidiary of a Corporate Debtor form Part of its Estate? By- Mr. Brajesh Raj

Does Assets of Subsidiary of a Corporate Debtor form Part of its Estate?

Authored By- Mr. Brajesh Raj

 3rd Year B.A.L.L.B

 New Law College

Bharati Vidyapeeth University, Pune

Introduction:

A corporate person means:

a) a company as defined under the Companies Act, 2013

b) a Limited Liability Partnership as defined under the Limited Liability Partnership Act, 2008

c) any other person incorporated with limited liability under any law

Section 8 of IBC, 2016 defines Corporate Debtor as A corporate debtor is a corporate person who owes a debt to any person.[1]

The assets of a corporate debtor are gathered and divided among its creditors during insolvency procedures. The assets of a debtor's subsidiary, on the other hand, are not included in the debtor's estate. We shall examine the causes of this and its ramifications for the corporate debtor and the subsidiary in this article.

TREATMENT OF SUBSIDIARY’S ASSETS DURING THE INSOLVENCY RESOLUTION PROCESS:

A corporation that is owned or managed by another organisation, referred to as the parent organisation, is said to be a subsidiary. The subsidiary has its own assets, obligations, and legal personality and is a distinct legal entity from the parent business. But the parent business holds a controlling stake in the subsidiary, either by holding the majority of its shares or by having the authority to choose the directors of the subsidiary.

While Section 18 of the IBC highlights the IRP's authority to seize control of the corporate debtor's assets, it also places restrictions on the term "assets" and excludes the assets of any Indian or overseas subsidiaries from its meaning. As a result, the IRP is prohibited from seizing the assets of any Indian or overseas subsidiary of the corporate debtor while exercising his authority under Section 18 of the IBC. Similar to this, Section 36(4)(d) of the IBC expressly states that no assets of a corporate debtor's Domestic or international subsidiaries shall be included in the liquidation estate.

Several holding corporations currently conduct business across various industries and have numerous subsidiaries and joint ventures both in India and abroad. Holding firms frequently don't engage in any significant business operations and instead get their wealth from the subsidiaries. Additionally, a holding company must aggregate the assets and liabilities of its affiliated and subsidiary entities in accordance with accounting standards.

The debtor's assets are gathered and distributed to its creditors as part of insolvency proceedings. This is so because the debtor is viewed as a single economic entity with a single estate made up of all of its assets and liabilities. The situation is different when it comes to a subsidiary of a company.

The reason why the assets of a subsidiary do not form part of the debtor's estate is that the subsidiary is a separate legal entity. This indicates that its financial resources are separate from those of the parent firm. As a result, the parent company's debts cannot be paid off with the subsidiary's assets. In other words, the assets of the subsidiary are segregated from the creditors of the main firm.

However, this does not mean that the subsidiary is completely immune from the effects of the parent company's insolvency. There are several ways in which the subsidiary can be affected.

First off, the subsidiary may be obligated to honour any assurances it made for obligations owed by the parent business. This indicates that the assets of the subsidiary may be indirectly used to settle the debts of the parent firm.

Second, the subsidiary might rely on the parent business for financial support or other resources. The parent firm could no longer be able to give the subsidiary the support it requires if it goes bankrupt. The operations and revenue-generating capacity of the subsidiary may be significantly impacted by this.

NCLT AND NCLAT RULING:

When examining and interpreting the scope of Section 18 of the IBC, the National Company Law Tribunal and the National Company Law Appellate Tribunal ("NCLAT") concluded that under Section 18 of the IBC, the IRP has the authority to seize control and custody of those assets over which the corporate debtor has ownership rights, as shown on the balance sheet of the corporate debtor. Interestingly, the NCLAT noted that according to the explanation for the purpose of Section 18(1), the term "assets" does not include assets owned by a third party in the corporate debtor's possession held under contractual arrangements, including bailment, when interpreting Section 18 of the IBC in the matter of Dynepro Private Limited and Ors vs. V Nagarajan. It also does not include assets of any Indian or foreign subsidiary of the corporate debtor and such other assets as may be notified by the Central Government.

Greater Noida Industrial Development Authority (GNIDA) v Roma Unicon Designex Consortium:

The Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as "IBC"), in the opinion of the NCLAT, New Delhi, recognises the assets of the corporate debtor and the subsidiary of the corporate debtor separately. Assets of the Corporate Debtor cannot, according to Section 18(1) Explanation, include assets of the subsidiary company. It was explained that because both firms have different legal positions, assets of the subsidiary company cannot be handled with in the Corporate Insolvency Resolution Process (CIRP) of a holding company.

Additionally, it was argued that the assets of the landholding firms, which are corporate debtor subsidiaries, cannot be considered corporate debtor assets. Finally, it was decided that the resolution plan cannot deal with lease land or include a clause allowing the lessor to transfer a leasehold interest without their consent.

The primary issues framed by the Tribunal for adjudication were:

1. Whether in CIRP proceedings, the assets of landholding companies (subsidiaries of the Corporate Debtor) can be treated as assets of the Corporate Debtor.
2. Whether the resolution plan can deal with lease land and have a provision for the transfer of leasehold right without prior permission of the GNIDA. 
3. Whether assets of a subsidiary company can be dealt with in CIRP proceedings of the holding company.[2]

The answers to the issues framed by the Tribunal:

1. Assets of the landholding companies (subsidiaries of the Corporate Debtor) cannot be treated as assets of the Corporate Debtor.
2. The resolution plan cannot deal with lease land and have a provision for the transfer of leasehold right without prior permission of the Lessor. 
3. Assets of a subsidiary company cannot be dealt with in CIRP proceedings of the holding company without the permission of the Lessor. [3]

CONCLUSION:

From the above, it is clear that in an insolvency resolution process initiated against the corporate debtor, the IRP can only take control over the assets over which the corporate debtor has ownership rights and cannot take charge of the assets of the subsidiary of the corporate debtor unless an order from the competent court/forum is obtained by the IRP.

However, it is pertinent to note that under Section 18 read with Section 36 of IBC, the IRP and the liquidator, respectively can exercise control over the shares of the subsidiary being the assets of the corporate debtor and thereby exercise control over the assets of the subsidiary.

[1] Insolvency & Bankruptcy Code, 2016, Act of Parliament, 1992.

[2] Latest Laws.com, [IBC] Assets of a subsidiary company to be excluded from CIRP proceedings of the holding company, expounds NCLAT, Latest Laws.com, (Feb 23, 2023), https://www.latestlaws.com/adr/case-analysis/assets-of-a-subsidiary-company-to-be-excluded-from-cirp-proceedings-of-the-holding-company-195462/

[3] Latest Laws.com, [IBC] Assets of a subsidiary company to be excluded from CIRP proceedings of the holding company, expounds NCLAT, Latest Laws.com, (Feb 23, 2023), https://www.latestlaws.com/adr/case-analysis/assets-of-a-subsidiary-company-to-be-excluded-from-cirp-proceedings-of-the-holding-company-195462/