ARE SUBSIDARIES INCLUDED AS ASSETS OF THE PARENT COMPANY DURING INSOLVENCY.

Once a company goes into insolvency, the Resolution Professional (RP) is mandated to take over all the assets of the Corporate Debtor thereto but the IBC code imposes some statutory restrictions to the term 'assets' stipulated under section 18 of the IBC code (herein after the code)

Do subsidiaries come under the purview of insolvency of the parent shareholding company?

It is a settled law that a subsidiary is a separate legal entity from its parent company as laid down by the celebrated english precedent in Salomon v. A. Salomon & Co. Ltd. [1897] AC 22. This foundational doctrine of a separate corporate personality has been consistently upheld by the Hon’ble Supreme Court of India, most notably in the landmark case of Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613, which has clarified that even a wholly-owned subsidiary does not lose its distinct identity and that its assets belong to it, not to its parent shareholder. 

The statutory provision of the IBC also restricts the assets of the subsidiary to be included with the parent company. Section 18 of the code imposes a duty on the RP to take custody of the corporate debtor’s assets by clarifying that the term “assets” shall not include the assets of any Indian or foreign subsidiary, and similarly, Section 36(4)(d) reinforces this firewall by expressly excluding the assets of any subsidiary from the ‘liquidation estate’ of the parent company, making them unavailable for recovery in the parent’s liquidation. 

A recent judgement of the Hon'ble Supreme court in BRS Ventures Investments Ltd. vs Srei Infrastructure Finance Ltd. & Anr., 2024 INSC 548  has cleared the air with respect to this issues and has observed that the “A holding company and its subsidiary are always distinct legal entities. The holding company would own shares of the subsidiary company. That does not make the holding company the owner of the subsidiary's assets. ... Therefore, the assets of the subsidiary company of the corporate debtor cannot be part of the resolution plan of the corporate debtor.”

The Hon'ble NCLAT, Delhi in Greater Noida Industrial Development Authority (GNIDA) vs. Roma Unicon Designex Consortium in Company Appeal (AT) (Insolvency) No. 180 of 2022 has also reiterated and opined that the "the assets of the Corporate Debtor and assets of subsidiary of the Corporate Debtor have been separately recognised and dealt with. 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 were not to be taken into consideration or treated as the assets of the Corporate Debtor.....the law is concerned with assets of the Corporate Debtor and its liabilities, so as 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."

Thus, in light of the statutory restrictions provided in the IBC code and also the precedents laid forewith, a subsidiary is barred from being included in the insolvency process of its parent company.