NCLAT: Assets of Subsidiary Company cannot be dealt within the CIRP Process of Holding Company without the permission of the Lessor
NCLAT: Assets of Subsidiary Company cannot be dealt within the CIRP Process of Holding Company without the permission of the Lessor
The National Company Law Appellate Tribunal (NCLAT), Principal bench, comprising of Justice Ashok Bhushan (Chairperson), Dr. Alok Srivastava (Technical Member) and Mr. Barun Mitra (Technical Member), ruled that the assets of the subsidiary company cannot be dealt with in Corporate Insolvency Resolution Process (in short CIRP) of a holding company.
The bench was adjudicating three appeals filed in the matter of Greater Noida Industrial Development Authority (GNIDA) vs. Roma Unicon Designex Consortium. The appeals arose out of CIRP initiated against the same Corporate Debtor i.e., Earth Infrastructure Ltd.
The Appellant's case was that three Lease Deeds were executed in favor of Earth Towne Infrastructure Pvt. Ltd., Neo Multimedia Pvt. Ltd., and Nishtha Software Pvt. Ltd. respectively. Subsequently, defaults arose on the part of the Lessee for payment of land premium, lease rent and other charges.
The appellant contended that the properties which were leased out to Neo Multimedia Pvt. Ltd. and Nishtha Software Pvt. Ltd. could not have been considered in CIRP of the Corporate Debtor which is a complete separate legal entity. Under the terms of the Lease Deed, no permission had ever been granted to transfer the leased land. The Subsidiary company, which was land holding company was a separate legal entity and the leased land cannot be held to be belong to the Corporate Debtor in any manner.
The appellant asserted before the NCLAT that the Adjudicating Authority had failed to appreciate that the immovable property of the third party cannot be considered as property of Corporate Debtor. The Appellant claimed that the Adjudicating Authority had erred in noting that the waiver sought were within the purview of Insolvency and Bankruptcy Code, 2016 (in short IBC) and impugned order passed were in violation of the principles of natural justice and no notice was issued to the Appellant, when the application was filed for approval of the Resolution Plan.
Among various issues the key considerations which arose before the NCLAT were the following:
1. Whether in the CIRP proceedings of the Corporate Debtor, i.e., Earth Infrastructures Limited, the assets of the land holding companies, i.e., subsidiary of the Corporate Debtor can be treated to be assets of the Corporate Debtor?
2. Whether, in the Resolution Plans submitted by the Successful Resolution Applicants, i.e., Roma Unicon Designex Consortium and Alpha Corp Development Private Limited, the assets of the subsidiary, i.e., lease lands could have been dealt and the Resolution Plan could legally contain a clause for transfer of the lease hold rights by the Appellant in favor of Successful Resolution Applicant without there being any prior permission from the Appellant?
3. Whether assets of the subsidiary companies can be dealt with in Corporate Insolvency Resolution Process of holding Company?
4. Whether the Appellant was required to be made party to the CIRP proceedings and heard before approval of any resolution plan dealing with the Project land?
5. Whether, Resolution Professional (RP) acted within the ambit of IBC in giving a certificate that Resolution Plans submitted by Roma Unicon Designex Consortium and Alpha Corp Development Private Limited are in accordance with the provisions of the Code?
The Appellate Tribunal with respect to issue nos. (1), (2), (3) being inter-related observed, "CIRP begins against a Corporate Debtor when he owes a debt and commits default in repayment of the debt. After appointment of Interim RP (IRP), the IRP comes into picture by issuing a Public Announcement of CIRP against the Corporate Debtor. The IRP is vested with the management of the Corporate Debtor from the date of his appointment under Section 18 of the IBC which deals with 'Duties of interim RP."
The Appellate Tribunal further opined that Lease Deed recognized Lessee as the entity who was to discharge all obligation towards the Appellant and admittedly, Lessee was the subsidiary Company of the Corporate Debtor. Earth Infrastructure Ltd., the holding Company had initially 78% share in the subsidiary Company, which subsequently increased to 98%. The Scheme of the Code has referred the assets of the subsidiary, assets of any Indian or foreign subsidiary of the Corporate Debtor. Thus, assets of the Corporate Debtor and assets of subsidiary of the Corporate Debtor have been separately recognized and dealt with.
The NCLAT noted the terms and conditions of the lease deed under which land was leased out to the land holding company and ruled that the transfer of plot as per terms and conditions of the lease could not have been effected without approval of the Appellant.
"Section 18, sub-section (1), Explanation further clarifies the law when it says that assets shall include the assets, meaning thereby assets of the Corporate Debtor, shall not include assets of any Indian subsidiary. In the CIRP of Corporate Debtor, thus, assets of subsidiary Company, i.e., Earth Towne were not to be taken into consideration or treated as the assets of the Corporate Debtor. As regards, the law relating to resolution process of a corporate person is concerned, the law is concerned with assets of the Corporate Debtor and its liabilities, to focus the resolution on the assets of the Corporate Debtor. The natural corollary to the above provision is that the assets of the subsidiary Company cannot be dealt with, in CIRP of a holding Company. Holding Company and subsidiary Company have separate legal status and the assets of subsidiary Company cannot be taken into consideration," observed the Appellate Tribunal.
The Appellate Tribunal remarked that the explanation to Section 18(1)(f) contemplates that assets of subsidiary company are entirely different from assets of the holding company and principle of lifting of veil cannot be invoked.
For the fourth issue, the NCLAT reckoned that the Corporate Debtor was lead shareholder of the land holding company in case of Earth Towne Infrastructures Pvt. Ltd. it being 98% shares and with respect to other two land holding companies it had 100% shareholding. In the CIRP Process of such corporate debtor, the Appellant was necessary party and without they being before the CIRP Process the land leased out by them could not have been made subject matter of the Resolution Plan.
With respect to the fifth issue, the Appellate Tribunal found the RP was well aware that the project land is a leased-out land which had been leased out by the Appellant to the land holding companies which fact has been clearly mentioned in the Information Memorandum.
"The development right in the project under which the developer is entitled to carry on development is not akin to any ownership/lease hold right in the leased land. RP has certified the Resolution Plan that it is in accordance with IBC which clearly deals with the project land that is lease land in its entirety," specified the Tribunal.
The RP had not communicated to the appellant about the receiving of the Resolution Plan and the nature of resolution plans which have been received nor invited attention of the Appellant that Appellant's dues are not being taken care in resolution plan, the dues of public authority such as of the Appellants cannot be so casually and negligently dealt, expressed the bench and hence they were satisfied that the RP had not acted within the ambit of the IBC.
Lastly, the bench directed the RP must publish a fresh Form-G inviting fresh Resolution Plans with specific condition that resolution plans shall be presented before the Committee of Creditors (COC) for consideration only when dues of the appellants are paid and permission of appellant is obtained for transfer of lease land and further ordered that the appellant must be made party to the CIRP of the Corporate Debtor, while setting aside the impugned order.
