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TMI Blog2025 (1) TMI 1266X X X X Extracts X X X X X X X X Extracts X X X X ..... Inc. based on the alleged under valuation of shares by the Respondent No. 1? HELD THAT:- The Adjudicating Authority has rightly held that in terms of the Code and the Regulation, the Corporate Debtor and its subsidiary are two legally distinct entities. It has also been correctly held that the assets of the subsidiary company cannot be treated as part of the assets of the Corporate Debtor. The Adjudicating Authority further rightly held that it is not the duty of the Respondent No. 2 to preserve the assets of the subsidiary company which are not under control of the Corporate Debtor or which are not part of estate of the Corporate Debtor. The Adjudicating Authority has also not found anything wrong in the selling of the shares of The Learning Internet Inc. - However, the Adjudicating Authority has held that the Respondent No. 1 being the corporate guarantor of the principal borrower i.e., EAPPL (subsidiary of the Corporate Debtor) has right to protect its interest in corporate guarantee and therefore the Respondent No. 1 can take certain step to protect himself to reduce risk of standing as guarantor to EAPPL. The Respondent No. 1 aggrieved due to alleged under valuation shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e National Company Law Tribunal, New Delhi Bench (Court-II) ('Adjudicating Authority') in IA. No. 187/ND/2022 in Company Petition No. (IB)- 101/(PB)/2017. 2. Mr. Shantanu Prakash who is the Suspended Director of Edu comp Solutions Limited ('Corporate Debtor') is the Respondent No. 1 herein. Mr. Mahendar Singh Khandelwal who is Resolution Professional of the Corporate Debtor is the Respondent No. 2 herein. Committee of Creditors ('CoC') of the Corporate Debtor is the Respondent No. 3 herein. State Bank of India is the Respondent No. 4. 3. The Appellant submitted that on 16.05.2008, Edu comp Asia Pacific Pte. Ltd. ("EAPPL"), a wholly-owned subsidiary of the Corporate Debtor, obtained loan facilities from the Appellant amounting to USD 20 million ("Loan Facility"). This funding was utilized to acquire a 51% stake in the US-based company, The Learning Internet Inc. 4. The Appellant submitted that on 22.05.2008, the Corporate Debtor executed a Deed of Guarantee in favor of the Appellant to secure the Loan Facility. Following the granting of this Loan Facility to EAPPL, the latter proceeded to acquire shares in The Learning Internet Inc. through a Purchase Agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Adjudicating Authority disposed of the application of the Respondent No 1 filed vide IA. No. 187/ND/2022 in Company Petition No. (IB)- 101/(PB)/2017 and made the following determinations in favour of the Appellant: a) The Adjudicating Authority acknowledged that the assets of a subsidiary company differ from those of its holding company, clarifying that shareholders do not acquire an interest in the assets of the company. b) It was held that the shares of The Learning Internet Inc. do not constitute part of the assets of the Corporate Debtor. c) The Resolution Professional (RP) was found to have no obligation to preserve the value of the shares of The Learning Internet Inc. held by EAPPL. d) The scope of undervalued transactions under the Code pertains to the assets of the Corporate Debtor, and thus no declaration regarding shares as an undervalued transaction could be granted. e) Lastly, it was determined that no moratorium applies to the shares held by EAPPL. 11. The Appellant stated that, after rendering along findings favourable to the Appellant on all material aspects, the Adjudicating Authority did not dismiss the Application but instead directed the Responden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow even a prima facie case is made out with respect to the undervalued transaction of the said sale of shares, when neither the EAPPL nor its liquidator raised objections to the said sale of shares. 15. The Appellant further submitted that the Adjudicating Authority while passing the Impugned Order has erred in not appreciating the fact that EAPPL, who is the principal borrower and is in liquidation, did not at any stage of its liquidation process or sale of shares objected to the said sale. To the contrary, the liquidators admitted to the fact that with respect to the said sale of shares, the liquidator had no better offer. 16. The Appellant submitted that the Impugned Order after giving findings passed in favour of the Appellant on majority of aspects, the Adjudicating Authority should have dismissed the Application of the Respondent No. 1, instead of going ahead to make reference to the Liquidation Regulations, which has no applicability in the Company Petition which is an insolvency proceeding of the Corporate Debtor and not liquidation proceedings. 17. The Appellant stated that Regulation 21 A Liquidation Regulations has no applicability to the present case, which is not ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssailed the conduct of the Respondent No.1 who has raised frivolous contentions with respect to sale of shares of The Learning Internet Inc. with the intention to convolute the CIRP of the Corporate Debtor. The Appellant explained that provisions of the Code make clear distinction between the assets and liabilities of the holding company and its subsidiary company during CIRP. 24. The Appellant submitted that the Respondent No. 1 has wrongly alleged that the sale of shares of The Learning Internet Inc. held by the EAPPL was executed by the Appellant and the Appellant explained that the said sale of shares of The Learning Internet Inc. was actually conducted by the Liquidators in the court monitored liquidation proceedings in Singapore, therefore, the validity or invalidity of the sale of shares is a matter on which the Courts at Singapore alone would have jurisdiction to look into, and the same cannot be made a subject matter of dispute in the Indian Courts. The Appellant mentioned that the Liquidation order has been adjudicated as per the laws of Singapore and do not fall under the purview of the CIRP of the Corporate Debtor and the Liquidators were appointed therein, under the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich they were sold by SBI Singapore--the claim of SBI Singapore would be reduced accordingly to that extent. The Respondent No.1 pleaded that the directive underscores the importance of accurate valuation in determining the financial obligations of the Corporate Debtor and its implications for SBI Singapore's claims. 31. The Respondent No. 1 submitted that the basis for challenging the Impugned Order is that the Adjudicating Authority directed the valuation of the shares of The Learning Internet Inc., which were pledged to SBI Singapore under a Pledge Agreement dated 23.07.2008. The Appellant contended that SBI Singapore sold these shares at an undervalued price in a clandestine manner, resulting in substantial losses to the Creditors of the Corporate Debtor. The Appellant argued that had the shares been sold at their rightful valuation, it would have benefitted the stakeholders and contributed to the revival of the Corporate Debtor. The Respondent No.1 argues that the Impugned Order, which merely directs a fresh valuation, aligns with the spirit and objectives of the Code, particularly with respect to value maximization and this directive is essential for ensuring that all st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directly impacts the resolution proceedings of the Corporate Debtor and the effective implementation of the Resolution Plan for all stakeholders involved. The Application highlights critical issues, facts, and questions of law that affect both the Corporate Debtor and the Creditors as the undervalued sale of The Learning Internet Inc. shares results in lesser funds being available for implementing the Resolution Plan, thereby extinguishing creditor claims and undermining their financial recovery. 36. The Respondent No. 1 stated that judicial pronouncements by the Supreme Court and this Appellate Tribunal have clarified the scope of Section 60(5) of the Code, which grants jurisdiction to the Adjudicating Authority to adjudicate disputes arising from or related to insolvency proceedings. In "Gujarat Urja Vikas Nigam Limited Vs. Amit Kumar Gupta & Ors." [(2021) 7 SCC 209], it was held that the Adjudicating Authority has jurisdiction to adjudicate disputes that arise solely from or relate to a corporate debtor's insolvency, establishing a necessary nexus with the insolvency process, therefore, addressing the undervalued sale is essential to ensure adequate funds are util ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould have benefitted all stakeholders involved. 41. The Respondent No. 1 submitted that, without prejudice to the statements made herein, Section 47 of the Code addresses undervalued transactions and grants the right to a creditor or partner of the Corporate Debtor to report such transactions to the Adjudicating Authority. However, the Code does not permit an undervalued transaction or asset sale to be executed at the behest of a creditor; it specifically allows for such transactions to be conducted by the Corporate Debtor itself. 42. Concluding his arguments, the Respondent No.1 urged this Appellate Tribunal to dismiss this appeal with costs. 43. The Respondent No.2 stated that he as an officer of the court is duty bound to assist this Appellate Tribunal by bringing on record the relevant facts and circumstances for the adjudication of the present Appeal. 44. The Respondent No.2 submitted that the Shares held by EAPPL in The Learning Internet Inc. do not form the assets of the Corporate Debtor and are therefore, beyond the remit of the Resolution Professional in terms of Section 18 and 23 of the code. The Respondent No.2 elaborated that in terms of Section 18 read with Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Section 14 of the Code. This position has been correctly articulated in Paras 21 to 23 of the Impugned Order. 48. Concluding his arguments, the Respondent No.2 submitted that he has brought out correct factual and legal position of the case. Findings 49. We have already noted the facts of the case during pleading so the Appellant and the Respondents, hence we shall not repeat the same. Suffice to note that the Impugned Order has been challenged by the Appellant on limited grounds regarding fresh valuation of shares of The Learning Internet Inc. held by EAPPL ordered by the Adjudicating Authority in Para 27 (a) and (b) and part portion of para 27 (c) of the Impugned Order dated 25.08.2023. 50. The Appellant has stated that he is not aggrieved by the remaining part of the Impugned Order and therefore requested us to set aside only perverse directions contained in Para 27 (a) and (b) and part portion of para 27 (c) of the Impugned Order. 51. Thus, it would be desirable to take into consideration the relevant portion of the Impugned Order which has been challenged by the Appellant, which reads as under :- "27. In view of the aforementioned, the present application is disposed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ext and not relevant. 53. We would like to take into consideration the relevant sections of the Code and Regulations governing the issues raised in the application including Regulation 21A of the Liquidation Regulations, which reads as under:- "21A. (1) A secured creditor shall inform the liquidator of its decision to relinquish its security interest to the liquidation estate or realise its security interest, as the case may be, in Form C or Form D of Schedule II: Provided that, where a secured creditor does not intimate its decision within thirty days from the liquidation commencement date, the assets covered under the security interest shall be presumed to be part of the liquidation estate. (2) Where a secured creditor proceeds to realise its security interest, it shall pay- (a) as much towards the amount payable under clause (a) and sub-clause (i) of clause (b) of sub-section (1) of section53, as it would have shared in case it had relinquished security interest, to the liquidator within ninety days from the liquidation commencement date; and (b) the excess of the realised value of the asset, which is subject to security interest, over the amount of his claims a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foreign subsidiary of the corporate debtor, and (c) such other assets as may be notified by the Central Government in consultation with any financial sector regulator. (f) 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 information utility or the depository of securities or any other registry that records the ownership of assets including - (i) assets over which the corporate debtor has ownership rights which may be located in a foreign country; (ii) assets that may or may not be in possession of the corporate debtor; (iii) tangible assets, whether movable or immovable; (iv) intangible assets including intellectual property; (v) securities including shares held in any subsidiary of the corporate debtor, financial instruments, insurance policies; (vi) assets subject to the determination of ownership by a court or authority;" (Emphasis Supplied) 55. We note that the Corporate Debtor i.e., ESL had one subsidiary i.e., EAPPL who had taken loan of USD 20 million from the Appellant on 14.05.2008 and entered into various loan and pledge agreements. 56. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (PB)/2017 under Section 60(5) r/w Section 47 of the Code before the Adjudicating Authority alleging an under-valued transaction of the shares by the Appellant and further sought directions against the Respondent No. 2 to file an appropriate application and to annul sale of shares by the Appellant. 64. We observe that the Adjudicating Authority disposed IA. No. 187/ND/2022 holding that shares are not assets of Corporate Debtor, however, directed the Respondent No. 2 to approach the IBBI for appointment of valuers for conducting a fresh valuation of 18,173 shares of The Learning Internet Inc. vide Impugned Order dated 25.08.2023 as contained in Para 27 (a) and (b) of the Impugned Order despite the fact that the shares were already sold on 03.09.2021 after negotiated deal by the Appellant and after obtaining NOC from the Liquidators of EAPPL in Singapore. 65. We observe that during the case was being heard by this Appellate Tribunal in the present appeal filed by the Appellant, this Appellate Tribunal stayed directions contained in Para 27(a) & (b) of the Impugned Order of the Adjudicating Authority on 18.10.2023. 66. The limited point to decide in this appeal is therefore is whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce the plea espoused on behalf of the Applicant that the Respondent Nos. 1 & 2 failed to discharge their legal obligations, in not taking steps to prevent the Respondent No. 4 from disposing off the shares held by Educomp Asia Pacific Pte Limited qua The Learning Internet Inc. (TLI) kept as a security with Respondent No. 4. 20. ………It is apparent from above that an undervalued transaction can be alleged only against the Corporate Debtor. The sale of shares owned by a subsidiary of CD, by the lender/financial creditor of the subsidiary of CD, with whom the same stood pledged as security for repayment of debt cannot be termed as a transaction by the CD (Corporate Debtor), thus there is no question of treating the same as an under-valued transaction. Thus, the plea raised on behalf of the Applicant for declaring the sale of the shares of The Learning Internet Inc. (TLI), owned by Edu comp Asia Pacific Pte Limited, by the Respondent No. 4 with whom the shares were pleaded as security for repayment of loan is not tenable and is nixed. 21. …….The Applicant is unable to show any contract, arrangement or any other instrument to establish that the CD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of Guarantee, whether it can question the valuation and sale price of the security pledged by the Corporate Debtor with the secured financial creditor as collateral/security." (Emphasis Supplied) Suffice to note that the four issues in Para 15(i), (ii), (iii) & (iv) were affirmed in favour of the Appellant i.e, SBI Singapore, however, the Adjudicating Authority gave a different view rejecting issues framed by the Adjudicating Authority in Para 15 (v). 68. In para 26 of the Impugned Order, the Adjudicating Authority had discussed regarding contract of guarantee between the Appellant and the Respondent No. 1 and also discussed the impact of Section 141 of the Indian Contract Act, 1872. The Para 26 of the Impugned Order reads as under :- "26. Upon the execution of a contract of guarantee, there exists a separate contract between the Creditor and the Guarantor, which can be enforced by the Creditor, when there is a breach without recourse to the borrower, who is the Principal Debtor. Once a debt has accrued and the Guarantor is called upon by the Creditor, the Guarantor is directly liable to the Creditor independent of the borrower's liability to the Creditor. Similarly, the G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Regulation, the Corporate Debtor and its subsidiary are two legally distinct entities. It has also been correctly held that the assets of the subsidiary company cannot be treated as part of the assets of the Corporate Debtor. The Adjudicating Authority further rightly held that it is not the duty of the Respondent No. 2 to preserve the assets of the subsidiary company which are not under control of the Corporate Debtor or which are not part of estate of the Corporate Debtor. The Adjudicating Authority has also not found anything wrong in the selling of the shares of The Learning Internet Inc. 70. However, the Adjudicating Authority has held that the Respondent No. 1 being the corporate guarantor of the principal borrower i.e., EAPPL (subsidiary of the Corporate Debtor) has right to protect its interest in corporate guarantee and therefore the Respondent No. 1 can take certain step to protect himself to reduce risk of standing as guarantor to EAPPL. 71. Further the Adjudicating Authority discussed Section 128 and Section 141 of the Indian Contract Act, 1872 as well as Section 2(f) and Section 13 (11) of SARFAESI Act, and held that like rights of surety under Section 141 of India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pugned Order. The Adjudicating Authority in its earlier para 25 discussed about Regulation 21 A of the Liquidation Regulations. We consciously note that the present case is regarding CIRP of the Corporate Debtor and not of the liquidation and therefore, in such case the Regulation 21 A of the Liquidation Regulations is not applicable. 77. Incidentally, we note that the Respondent No. 1 referred to valuation report i.e. SBI capital valuation of shares on USD deed 23.24 million somewhere in the year 2008. Similarly, the Respondent No. 1 has referred to valuation report of M/s Mazars conducted an equity valuation in March, 2014 at USD 42.049 million and finally the Appellant referred the higher valuation figures determined by Sapient Services Pvt. Ltd. We note that the Appellant, in his Written Submissions (given to us on 14.12.2024 after order was reserved on 12.12.2024) brought out that the aforesaid valuation reports by the Respondent No. 1 are documents placed on record for the first time without seeking the permission of this Appellate Tribunal. 78. We observe that the valuations were done at different time periods and in different context on different issues and we are, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duced its claim from Rs. 112,82,42,159.97 (USD 17,455,969,65) to Rs. 67,17,18,480.81 (USD 10,392,713.40). 84. The Respondent No. 2/ RP brought to our notice vide para 4.15 of the Reply to the Appeal that IBBI has also filed Reply a reply dated 30.10.2023 before the Adjudicating Authority in CP No. (B) 101/2017 and asserted that it is not in the domain of IBBI in terms of applicable rules of CIRP and IBBI liquidation valuation to appoint registered values. The relevant part of the reply of the Respondent No. 2 contained in Para 4.15 which reads as under :- "4.15. Pertinently, IBBI has also filed a reply dated 30.10.2023 before the Hon'ble Tribunal in C.P. No. (IB) 101/2017. It has been asserted in their reply that while the Impugned Order directs the IBBI to appoint registered valuers to do the valuation of shares, it is not in the domain of the IBBI in terms of the applicable CIRP Regulations and the IBBI (Liquidation Process) Regulations 2016, to appoint registered valuers. Accordingly, it has been submitted that the Hon'ble Tribunal may pass appropriate in light of the reply submitted on behalf of IBBI." (Emphasis Supplied) We find merit in the contention of the IB ..... X X X X Extracts X X X X X X X X Extracts X X X X
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