Subsidiary’s Assets not to form part of Holding Company CIRP under IBC

The Hon’ble Supreme Court of India (“Supreme Court”) in the case of BRS Ventures Investments Ltd. Vs. SREI Infrastructure Finance Ltd. (“Case”), which was decided on July 23, 2024, held that a financial creditor, who has involuntarily accepted part payment of the credit provided to the corporate debtor from a corporate guarantor, due to a corporate insolvency resolution process (“CIRP”) against the corporate guarantor, shall have the right to simultaneously or thereafter, file an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), against the corporate debtor, seeking repayment of the remaining dues, as the part payment of credit by the corporate guarantor does not extinguish the liability of the corporate debtor to repay the remaining dues. 

Brief Facts of the Case:

Gujarat Hydrocarbon and Power SEZ Limited (“Corporate Debtor”) which is a subsidiary of Assam Company India Limited (“Corporate Guarantor”), secured a loan of INR 100 crores from SREI Infrastructure Finance Ltd. (“Financial Creditor”), wherein the loan was granted basis, including but not limited to, the guarantee provided by the Corporate Guarantor. 

The Financial Creditor in pursuance to recover the credit amount, commenced proceeding in the Debt Recovery Tribunal, however, upon the default committed by the Corporate Debtor, the Financial Creditor filed an application under Section 7 of the IBC against the Corporate Guarantor. 

The aforesaid application was accepted and the CIRP commenced, wherein BRS Ventures Investments Ltd. (“Resolution Applicant”) was the successful applicant, upon the payment of INR 38.87 crores, in full and final settlement towards the claim of the Financial Creditor amounting to INR 241.27 crores. 

Thereafter, the Financial Creditor filed another application under Section 7 of the IBC against the Corporate Debtor, seeking repayment of the remaining amount, which had been challenged by the Resolution Applicant before the National Company Law Appellate Tribunal (“NCLAT”). The Resolution Applicant has appealed before the NCLAT, on account of the payment being made to the Financial Creditor, on a full and final settlement basis, therefore, basis Section 140 of the Indian Contracts Act, 1872 (“ICA”), the Resolution Applicant shall step in the shoes of the Financial Creditor and be entitled to the amount paid as guarantee on behalf of the Corporate Guarantor, however, the same was dismissed by the NCLAT. Aggrieved by the order of the NCLAT, the Resolution Applicant approached the Supreme Court. 

Supreme Court's Observations:

The Supreme Court of India, while deciding the Case, observed the following: 

Subrogation Rights: The Supreme Court herein assessed Section 140 of the ICA, wherein they determined that, unless explicitly limited, a Corporate Guarantor shall be liable towards the entire amount of credit provided to the Corporate Debtor. Thus, basis the current factual scenario, wherein the Financial Creditor has involuntarily accepted part payment of the entire credit, due to the CIRP, the Financial Creditor shall have the right to invoke proceedings against the Corporate Debtor to recover the remaining amount of credit.

Distinct Legal Entities: As the Resolution Applicant, in its appeal stated that basis the information memorandum provided at the time of CIRP of the Corporate Guarantor, it had been stated that assets of the Corporate Debtor were also part of the CIRP, which was thus acquired by the Resolution Applicant. However, the Supreme Court herein held that companies being related in the nature of holding-subsidiary, does not omit the element of independent legal entities. Therefore, as the CIRP herein was conducted for the Corporate Guarantor, the assets of the Corporate Debtor would not fall under its purview.