Source: Supreme Court 

Why in News? 

A bench of Justice Abhay Oka and Justice Pankaj Mithal held that “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”. 

• The Supreme Court gave this judgment in the case of BRS Ventures Investments Ltd. v. SREI Infrastructure Finance Ltd. & Anr. 

What is the Background of BRS Ventures Investments Ltd. v. SREI Infrastructure Finance Ltd. & Anr.?  

• Gujarat Hydrocarbon and Power SEZ Limited (corporate debtor) took a loan of Rs. 100 crores from SREI Infrastructure Finance Limited (financial creditor) in 2011. 
• The loan was secured by mortgage of leasehold land, pledge of shares, and a corporate guarantee from Assam Company India Limited (ACIL). 
• Due to default, the financial creditor invoked ACIL's corporate guarantee and filed for insolvency proceedings against ACIL. 
• ACIL underwent insolvency resolution, with the appellant as the successful resolution applicant. The appellant paid Rs. 38.87 crores to the financial creditor against its admitted claim of Rs. 241.27 crores. 
• In 2020, the financial creditor filed for insolvency proceedings against the original corporate debtor (Gujarat Hydrocarbon) for the remaining loan amount of Rs. 1428 crores. 
• The appellant challenged this, arguing that the corporate debtor's liabilities were extinguished through ACIL's resolution process. 

What are the Court’s Observations?  

• Separate Proceedings Allowed:  
  • The court affirmed that separate insolvency proceedings can be filed against both the corporate debtor and corporate guarantor, simultaneously or otherwise. 
• Assets of Subsidiary Not Included:  
  • The court clarified that assets of a subsidiary company cannot be part of the resolution plan of the holding company. ACIL's resolution did not include Gujarat Hydrocarbon's assets. 
• Limited Subrogation Rights:  
  • The court held that subrogation rights under Section 140 of the Contract Act are limited to the amount actually paid by the surety (Rs. 38.87 crores in this case). 
• Continuing Liability of Corporate Debtor:  
  • The court ruled that the corporate debtor's liability to repay the loan is not extinguished by the partial payment made during the guarantor's insolvency resolution. 
• Validity of Second Insolvency Application:  
  • The court upheld the validity of filing a separate insolvency application against the original corporate debtor for the remaining debt. 
• Distinction Between Holding and Subsidiary Companies:  
  • The judgment emphasized the legal separation between holding and subsidiary companies, stating that a holding company does not own its subsidiary's assets. 

What is a Holding Company and Subsidiary Company? 

Holding Company: 

• A holding company is a corporate entity that owns a controlling interest in other companies, known as subsidiaries.  
• Under the Companies Act, 2013 in India, a holding company is one that holds at least 50% of the shares of another company or controls the composition of its board of directors. 

Subsidiary Company: 

• A subsidiary company, on the other hand, is a company whose operations and decision-making are controlled by another company (the holding company).  
• The holding company typically owns more than 50% of the subsidiary's shares.  
• If the holding company owns 100% of the shares, it's called a wholly-owned subsidiary. 

What is the Difference Between a Holding and Subsidiary Company? 

What are the Landmark Judgments on Holding Company and Subsidiary Company? 

• Life Insurance Corporation of India v. Escorts Ltd. & Others (1986) 
  • This case addressed the issue of control in holding-subsidiary relationships: 
  • "The mere fact that a company has a controlling shareholding in other companies does not make the other companies its subsidiaries unless the holding company is in a position to control the composition of the Board of Directors of the other companies." 
• State of Madhya Pradesh v. Dalia (2001) 
  • This case dealt with the issue of piercing the corporate veil in cases of holding-subsidiary relationships: 
  • “The corporate veil may be lifted where the subsidiary is the mere alter ego of the parent company and where the subsidiary has been used for tax evasion or to circumvent tax obligation”. 
• GVK Industries Ltd. & Anr v. The Income Tax Officer & Anr (2011) 
  • This constitutional bench judgment laid down the principles for extra-territorial application of laws: 
  • The court held that Parliament is entitled to legislate with respect to extra-territorial aspects or causes that have a substantial and direct connection to India. 
• Vodafone International Holdings BV v. Union of India (2012) 
  • This landmark case emphasized the separate legal status of holding and subsidiary companies. The Supreme Court of India held: 
  • "A company is a separate legal persona and the fact that all its shares are owned by one person or by the parent company has nothing to do with its separate legal existence. If the owned company is wound up, the liquidator, and not its parent company, would get hold of the assets of the subsidiary." 
• Securities and Exchange Board of India v. Pan Asia Advisors Limited and others (2015) 
  • This case dealt with SEBI's jurisdiction over foreign subsidiaries: 
  • The Supreme Court held that if SEBI can demonstrate that a provision would protect against fraud and secure the interests of investors and the stock market in India, it can uphold such an extra-territorial operation of the law under the 'India Nexus test'.