Shareholdings in Subsidiaries Can't Be Excluded from Valuation Reports: NCLT

Shareholdings in Subsidiaries Can't Be Excluded from Valuation Reports: NCLT

Introduction

The National Company Law Tribunal (NCLT), Bengaluru Bench has held that the shareholdings of a corporate debtor in its subsidiaries constitute an integral part of its financial assets and therefore cannot be excluded from valuation reports. The Tribunal emphasized that such exclusion compromises the fairness and integrity of the Corporate Insolvency Resolution Process (CIRP).

Factual Background

The applicant filed a petition seeking fresh valuation of the subsidiaries and step-down subsidiaries of the corporate debtor. It was contended that the valuation of the corporate debtor at only ₹40 crores against an admitted debt of ₹2300 crores was based on incomplete information.

The applicant further submitted that the Resolution Professional (RP) failed to gain control over the debtor’s assets despite repeated non-compliance under Section 19 of the IBC, thereby compromising the integrity of the CIRP and the valuation process.

Procedural Background

The RP admitted that the corporate debtor had invested ₹448 crores in its subsidiaries and step-down subsidiaries. However, the valuation reports did not consider these equity investments, citing lack of information and non-cooperation by the suspended directors.

Issues

1. Whether the shareholdings of the corporate debtor in its subsidiaries can be excluded from valuation reports?

2. Whether the RP’s failure to gain control over the debtor’s assets compromised the CIRP and valuation process?

Contentions of the Parties

Applicant’s Contention: The applicant argued that the valuation was incomplete and inaccurate due to the RP’s failure to include subsidiary investments and to take effective steps under Section 19(2) of the IBC.

Respondent’s Contention: The respondent contended that the applicant had no locus standi to challenge valuation reports, as their purpose is only to assist the Committee of Creditors (CoC) in evaluating and approving a resolution plan. Once approved by the CoC, the Adjudicating Authority’s scope is limited to ensuring statutory compliance under Sections 30 and 31 of the IBC.

Reasoning and Analysis

The bench of Shri Sunil Kumar Aggarwal (Judicial Member) and Shri Radhakrishna Sreepada (Technical Member) noted that, despite repeated assurances from suspended directors and awareness of valuation gaps, the RP failed to act under Section 19(2) of the IBC.

The Tribunal stressed that the RP’s conduct compromised value maximization, a cornerstone of the CIRP. It observed that the corporate debtor’s equity in subsidiaries forms part of the CIRP estate under Section 18 of the IBC, though not the underlying assets themselves (which fall under the liquidation estate in Section 36).

The NCLT concluded that excluding subsidiary shareholdings due to non-cooperation of suspended directors resulted in incorrect valuation and material prejudice to the CIRP process. It further directed that the RP’s lapses warranted referral to the Insolvency and Bankruptcy Board of India (IBBI) for disciplinary inquiry.

Outcome

The NCLT allowed the application, holding that the shareholdings of the corporate debtor in its subsidiaries and step-down subsidiaries are an integral part of its financial assets and cannot be excluded from valuation reports.

Representation

For the applicant: Mr. Sangamithra T and Ms. Aneeta Mathew, Advocates.