Assets of Foreign Subsidiary Under Liquidation Not Part of Corporate Debtor’s CIRP – NCLAT Holds Indian Authority Has No Jurisdiction to Order Valuation

NCLAT held that assets of a foreign subsidiary undergoing liquidation are not part of the Corporate Debtor’s CIRP and that the Indian Adjudicating Authority has no jurisdiction to order a valuation of such assets.

The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, comprising Justice Rakesh Kumar Jain (Judicial Member) and Mr. Naresh Salecha (Technical Member), while reviewing an appeal along with connected IAs, held that the assets of a wholly owned foreign subsidiary undergoing liquidation under the supervision of a foreign court cannot be treated as assets of the Corporate Debtor during its CIRP. Consequently, the Indian Adjudicating Authority lacks jurisdiction to direct valuation or interfere with such assets. The Tribunal further held that Regulation 21A of the IBBI (Liquidation Process) Regulations, 2016, is inapplicable to CIRP proceedings.

In a significant decision, the National Company Law Appellate Tribunal (NCLAT) allowed the appeal preferred by State Bank of India, Singapore Branch, under Section 61(1) of the Insolvency and Bankruptcy Code, 2016, against the order dated 25.08.2023 of the National Company Law Tribunal (NCLT), New Delhi Bench (Court-II). The dispute arose in connection with the sale of pledged shares held by Educomp Asia Pacific Pte. Ltd. (EAPPL), a wholly owned subsidiary of the Corporate Debtor, Educomp Solutions Ltd., which was undergoing liquidation in Singapore. The Appellant, having extended a USD 20 million loan to EAPPL against a corporate guarantee and pledged shares, sold the shares in 2021 with the approval of the Singapore court-appointed liquidator. The NCLT, however, directed a fresh valuation of the shares by Registered Valuers under IBBI regulations, holding that if the valuation exceeded the sale price, the Appellant’s claim would stand reduced.

The Appellant challenged the applicability of IBBI (Liquidation Process) Regulations, 2016, to the CIRP of the Corporate Debtor, asserting that the pledged shares were not assets of the Corporate Debtor and that the sale occurred under the supervision of a foreign court, thereby placing it outside the jurisdiction of Indian authorities. It was argued that Sections 14, 18, 45, and 46 of the Code were inapplicable as the transaction neither occurred during the relevant period nor was it executed by the Corporate Debtor. The Appellant further contended that the application filed by the suspended director was frivolous and not maintainable.

The Respondents, including the suspended director and the Resolution Professional, presented divergent views. While the suspended director supported the valuation directions on grounds of stakeholder interest and value maximization, the Resolution Professional submitted that the shares were not assets of the Corporate Debtor as per Sections 18 and 23 of the Code, and hence, outside the scope of CIRP proceedings. He contended that the moratorium under Section 14 and the provisions concerning undervalued transactions under Sections 45 and 47 were not attracted, as the Corporate Debtor was not a party to the sale.

Upon adjudication, the NCLT had originally ruled in favour of the Appellant on four of the five issues, including the classification of the shares as non-assets of the Corporate Debtor, and the inapplicability of the moratorium and undervaluation provisions. However, it held against the Appellant on the limited issue of whether a corporate guarantor could question the valuation, relying on the Indian Contract Act and the SARFAESI Act. Consequently, it directed a fresh valuation by IBBI-registered valuers, with costs imposed on the Appellant.

The Appellate Tribunal found that the NCLT had acted beyond its jurisdiction by ordering valuation of assets that did not belong to the Corporate Debtor and were under foreign liquidation. It held that Regulation 21A of the Liquidation Regulations, 2016, had no application to CIRP and that no interference was warranted in a transaction undertaken with the consent of the Singapore liquidators. It also noted the absence of credible evidence indicating collusion or undervaluation, particularly as the objecting party had previously waived its rights under the guarantee deed.

Relying on the Supreme Court judgment in GNIDA v. Roma Unicon Designex Consortium, the NCLAT reaffirmed that assets of a subsidiary cannot be treated as assets of the Corporate Debtor during CIRP. Finding merit in the Appellant’s submissions, the NCLAT allowed the appeal and set aside the impugned directions for valuation contained in paras 27(a), 27(b), and part of 27(c) of the NCLT order. The remaining parts of the order were left intact, no costs were awarded, and pending applications were closed.

Mr. Ankur Mittal and Ms. Yashika Sharma, Advocates, represented the Appellant.

Mr. Sunil Fernandes, Sr. Advocate, along with Mr. Malak Bhatt, Ms. Rajshree Chaudhary, Ms, Diksha Dadu and Ms. Somya Saxena, Advocates, appeared for Respondent No. 1.

Mr. Abhishek Sharma, Kritya Sinha and Ms. Shruti Poddar, Advocates, appeared for Respondent No. 2.

Ms. Moulshree Shukla and Ms. Gayathri, Advocates, appeared for Respondent No. 3.

Mr. Ashim Sood and Mr. Aditya Vardhan Sharma, Applicants in IA No. 6007 of 2023.

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