Retaining the independence of a subsidiary

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subsidiary

Dear Editor,

An insolvency resolution professional (IRP) can stop a holding company from moving assets of a subsidiary that is going through a corporate insolvency resolution process because both the companies are separate legal entities. The holding company does not own the assets of the subsidiary and, in law, the management of the business of the subsidiary vests in its board of directors. Shares of the subsidiary are held as assets on the books of the parent company and can be issued as collateral for additional debt financing. It is settled law that a company is a juristic person and is distinct from the shareholders. It is the company that owns the property and not the shareholders.

Section 18 of the Insolvency and Bankruptcy Code, 2016, provides for the duties of the IRP. As per the section, the IRP shall take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor, or with the information utility or the depository of security or any other registry that records the ownership of assets. Further, while undergoing liquidation under section 36 of the code, assets as mentioned are “any assets over which the corporate debtor has ownership rights, including all rights and interests therein as evidenced in the balance sheet of the corporate debtor”.

In Alpha & Omega Diagnostics (India) Ltd v Asset Reconstruction Company of India Ltd & Ors, the National Company Law Appellate Tribunal (NCLAT), while interpreting section 14 of the code has held that the term “its” used in the section denotes the property owned by the corporate debtor. The properties not owned by the corporate debtor do not fall within the ambit of the moratorium. The tribunal further held that it has no legislative competence to expand the scope of the term “its”. This principle was further upheld in the case of Schweitzer Systemtek India Pvt Ltd v Phoenix ARC Pvt Ltd & Ors, where the NCLAT had held that the properties not owned by the corporate debtor do not fall within the ambit of the moratorium under section 14 of the code.

From the aforesaid ruling, it can be derived that once the insolvency resolution process has been admitted and initiated, only such properties that are reflected in the balance sheet of the corporate debtor are subject to the insolvency resolution process.

To conclude, the holding company does not have any control over the assets of the subsidiary, which are specifically mentioned in its books of accounts. The holding company might have securities including shares in the subsidiary and may have power to only proceed against them.

Jubin Jay
National Law University Odisha
Cuttack

 

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