IBC prohibits inclusion of assets of Indian or Foreign subsidiary of the Corporate Debtor in the liquidation estate: NCLAT

IBC prohibits inclusion of assets of Indian or Foreign subsidiary of the Corporate Debtor in the liquidation estate: NCLAT

The National Company Law Appellate Tribunal (NCLAT) has ruled that Section 36(4)(d) of the Insolvency and Bankruptcy Code, 2016 (IBC) prohibits inclusion of assets of Indian or Foreign subsidiary of the Corporate Debtor in the liquidation estate.

As to the facts of the case, the Respondents had extended corporate guarantee for the financial debt released to corporate debtor (IVRCL Limited) vide Deed of Guarantees Agreements. The Respondents had created equitable mortgaged by depositing the title deeds over some assets exclusively charged to the Appellant (Union Bank of India). The asset mortgaged was an Exclusive Security and it belonged to the Respondents and was exclusively executed in favour of the Appellant Bank.

The State Bank of India filed an application before the National Company Law Tribunal (NCLT) – Hyderabad Bench, under section 7 of the IBC to initiate Corporate Insolvency Resolution Process (CIRP) against the corporate debtor (IVRCL Limited) when its account classified as Non-Performing Asset (NPA) and the Adjudicating Authority admitted the application in February 2018 and as no successful resolution plan was approved by the Committee of Creditors ('CoC'), the Adjudicating Authority passed an order of liquidation under section 33 of the IBC in July 2019.

The Adjudicating Authority directed the Appellant Bank to refrain from taking any coercive steps against the Respondents such as sale of the properties mortgaged to the bank by the Respondent Companies till the completion of the Liquidation proceedings of the corporate debtor.

The Appellant Bank submitted that it relinquished its interest only in common securities belonging to corporate debtor in liquidation estate and did not relinquish its rights of Exclusive Securities. The Appellant Bank also initiated proceedings under SARFAESI Act in respect of the securities created by Respondents.

The respondents had contended to the NCLT that Section 238 of the IBC supersedes the provisions of the SARFAESI Act and hence the proceedings initiated by the Appellant Bank under the SARFAESI Act were illegal and had no bearing on the IBC proceedings.

The Adjudicating Authority considered the sale of corporate debtor as a "going concern" in the process of liquidation and that one M/s. Gabs Megacorp Ltd has given a bid to take the corporate debtor as a going concern for a value of Rs. 1654.77 crores. The Adjudicating Authority also considered its authority under Section 60(5)(c) of the IBC and maintained that the application is maintainable.

The NCLT further asserted that the Appellant Bank, if allowed to proceed with the possession notice, there is every chance that it would diminish the value of the liquidation estate and its shareholders. The Adjudicating Authority is of the view that there is no restraint on Financial creditor to proceed against the guarantor even after initiation of CIRP, approval of Resolution Plan or liquidation proceedings being commenced or closed.

Aggrieved by the order of the Adjudicating Authority, the Appellant Bank appealed to the NCLAT.

The NCLAT ruled that the assets of the subsidiaries are outside the purview of liquidation estate and as such cannot form part of the liquidation estate.

The Appellate Authority further held, "Since these exclusive securities were not forming part of liquidation estate, correctly done by Liquidator to comply with the provisions of Section 36 of the Code and precedence of this Appellate Tribunal already exists & the Code vide Section 36(4)(d) prohibits inclusion of assets of Indian or Foreign subsidiary of the Corporate Debtor in the liquidation estate, we have to set aside the impugned order of the Adjudicating Authority and allow the present appeal. The Appeal is accordingly allowed."