Case study: BRS Ventures Investments Ltd. v. SREI Infrastructure Finance Ltd. & Anr.

By Anish Sinha 14 Minutes Read

Citation: Civil Appeal No. 4565 of 2021

Date of judgment: 25^th July, 2024

Bench: Justice Abhay S. Oka and Justice Pankaj Mithal

Court: Supreme Court of India

Facts

• SREI Infrastructure Finance Ltd. (Financial Creditor/1st Respondent) granted Gujarat Hydrocarbon and Power SEZ Ltd. (Corporate Debtor/Principal Borrower/2nd Respondent) a loan of Rs. 100 crores for setting up a SEZ project. The Corporate Debtor was a subsidiary of M/s. Assam Company India Limited (ACIL).
• The loan was granted by the Financial Creditor to the Corporate Debtor and the same loan 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. On account of the default committed by the Corporate Debtor, the Financial Creditor invoked the corporate guarantee of ACIL. Thereafter, an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) was filed against ACIL and the Adjudicating Authority vide order dated 26.10.2017 admitted the said application.
• In response the Financial Creditor filed a claim of Rs. 648.81 crores, out of which the claim of Rs. 241.27 crores inclusive of the principal amount of Rs.100 crores. The resolution plan of BRS Ventures Investments Ltd. (Successful Resolution Applicant/Appellant) was approved by the Adjudicating Authority by the order dated 20.09.2018.
• The Successful Resolution Applicant/Appellant paid Rs. 38.87 crores to the 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.
• The order of the Adjudicating Authority approving the Resolution Plan was confirmed on appeal by the NCLAT.
• On 10.02.2020, the Financial Creditor filed an application under Section 7 of the IBC against the Corporate Debtor/Principal Borrower claiming of Rs.1428 crores, which was claimed to be the balance amount payable to the Financial Creditor under the loan facility of Rs.100 crores. By the order dated 18.11.2020, the Adjudicating Authority admitted the application under Section 7 of the IBC.
• By the impugned judgment of the NCLAT, appeals preferred by Successful Resolution Applicant/Appellant and suspended Director have been dismissed.

Decision of NCLAT

When the order of the adjudicating authority was confirmed in appeal by the National Company Law Appellate Tribunal (NCLAT), the 1st respondent (SREI Infrastructure Finance Limited (the financial creditor)) filed an application under Section 7 of the IBC against the 2nd respondent corporate debtor.

The claim of the 1st respondent-financial creditor was of Rs.1428 crores, which is claimed to be the balance amount payable to the financial creditor under the loan facility of Rs.100 crores. Aggrieved by the order of adjudicating authority (NCLT), the appellant preferred an appeal before the NCLAT. A suspended Director of the corporate debtor also preferred an appeal against the said order of the adjudicating authority. But by the impugned judgment of the NCLAT, both appeals have been dismissed.

Judgment

The court upheld the NCLAT decision and dismissed an appeal filed by a Successful Resolution Applicant of a Corporate Guarantor against NCLT’s decision to admit Financial Creditor’s application for recovery of balance amount from the Corporate Debtor.

The court ruled that a holding company and its subsidiary are always distinct legal entities. The holding company would own shares of the subsidiary company. That does not make the holding company the owner of the subsidiary’s assets…Therefore, the assets of the subsidiary company of the corporate debtor cannot be part of the resolution plan of the corporate debtor.

Key legal issues discussed

1. Whether the assets of the Corporate Debtor were part of CIRP in respect of Corporate Guarantor (ACIL)?

No

It is clear in the fact that there is a mandate of Section 36(4)(d) of the IBC that the assets of an Indian subsidiary of the Corporate Debtor shall not be included in the liquidation estate assets and shall not be used for the recovery in liquidation. In provision, Section 18 entrusts several duties to the IRPs concerning the Corporate Debtor’s assets. Consistent with the provisions of Section 36(4)(d), the explanation (b) to Section 18(1) provides that the term ‘assets’ used in Section 18 shall not include the assets of any Indian subsidiary of the Corporate Debtor.

Court held that a holding company and its subsidiary are always distinct legal entities. The holding company would own shares of the subsidiary company. Here the court noted that “A holding company and its subsidiary are always distinct legal entities. The holding company would own shares of the subsidiary company. That does not make the holding company the owner of the subsidiary’s assets…Therefore, the assets of the subsidiary company of the corporate debtor cannot be part of the resolution plan of the corporate debtor”

In the case of Vodafone International Holdings BV v. Union of India & Anr.[1] , the Court took the view that if a subsidiary company is wound up, its assets do not belong to the holding company but to the liquidator. As mentioned in the decision, the reason is that a company is a separate legal persona and the fact that the parent company owns all its shares has nothing to do with its separate legal existence. Therefore, the assets of the subsidiary company of the Corporate Debtor cannot be part of the resolution plan of the Corporate Debtor.

2. Can Simultaneous Proceedings take place under the IBC against Corporate Debtors and Guarantors?

Yes

Under Section 60 sub-sections (2) and (3), the IBC allows financial creditors to initiate separate or simultaneous proceedings against both the corporate debtor and the guarantor, the court observed, highlighting that if insolvency proceedings for both are pending before different Adjudicating Authorities, they must be transferred to the NCLT handling the corporate debtor’s case.

Section 60(3) provides that if CIRP (corporate insolvency resolution process) in respect of the corporate guarantor is pending before an Adjudicating Authority and if the CIRP against the Corporate Debtor is pending before another Adjudicating Authority, then accordingly, CIRP proceedings against the corporate guarantor must be transferred to the Adjudicating Authority before whom CIRP in respect of the corporate debtor is pending. Thus, 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.

Note: Clauses (a) and (i) of Section 5(8) of IBC state that the money borrowed against the payment of interest and the amount of any liability in respect of any guarantee for repayment of the loan covered by clause (a) have been put under separate headings. Thus, 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.

3. Is Subrogation under Section 140 of the Indian Contract Act, 1872 possible?

Yes, but with limitations and extent

Court held that the subrogation will be only to the extent of the amount recovered by the creditor from the surety. 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.

Here in the present case, CIRP of ACIL, the Successful Resolution Applicant/Appellant paid a sum of Rs.38.87 crores only to the Financial Creditor. As the said amount was paid by the Successful Resolution Applicant/Appellant on behalf of ACIL, the corporate guarantor, the rest of the amount was payable as per the guarantee, the Financial Creditor took the same because of the involuntary process by operation of law. 

So, here only the liability of ACIL under the corporate guarantee to repay the loan to the Financial Creditor has been extinguished on the payment of Rs. 38.87 crores. And by the involuntary act of the creditor of accepting part of the amount from the surety in the discharge of the entire liability of the surety, even if Section 140 is attracted, will confer on the guarantor or the Successful Resolution Applicant/Appellant the right to recover only the amount mentioned above from the Corporate Debtor.

So, from the above schema it is clear that subrogation will be only to the extent of the amount recovered by the creditor from the surety. 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.

Note: In the case of Economic Transport Organization, Delhi v. Charan Spinning Mills Pvt. Ltd. & Anr.[2], it was held that the doctrine of subrogation is a creature of equity. Therefore, the Section will have to be interpreted having regard to the equitable principles. If the surety pays the entirety of the amount payable under guarantee to the creditor, Section 140 provides a remedy to the surety to recover the entire amount paid by him in the discharge of his obligations. Therefore, the surety gets invested with the rights of the creditor to recover from the principal debtor the amount which was paid as per the guarantee. If the surety pays only a part of the amount payable to the creditor, the equitable right the surety gets under Section 140 will be confined to the debt he cleared.

Conclusion

The Supreme Court concluded the judgment with the ruling that the financial creditor’s right to recover the balance debt from the corporate debtor remains unaffected, upholding the NCLAT’s decision and dismissing the appeal. After the whole argument court ruled that a holding company is not the owner of its subsidiary’s assets and thus, subsidiary assets cannot be included in the holding company’s resolution plan.

[1] [2012] 1 S.C.R. 573.

[2] JT 2010 (2) SC 271.

Anish Sinha