NCLT Bengaluru Orders Fresh Valuation of Corporate Debtor’s Subsidiary Shareholdings, Terms Exclusion a Serious Lapse
Pranav B Prem
The National Company Law Tribunal (NCLT), Bengaluru Bench of Shri Sunil Kumar Aggarwal (Judicial Member) and Shri Radhakrishna Sreepada (Technical Member) has held 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. The Tribunal observed that excluding such assets compromises the fairness and integrity of the Corporate Insolvency Resolution Process (CIRP).
The application was filed by HDFC Bank Limited under Rule 11 of the NCLT Rules, 2016, seeking a fresh valuation of the subsidiaries and step-down subsidiaries of the corporate debtor, Opto Circuits (India) Ltd., and deferring the approval of the resolution plan until such valuation was completed. The applicant argued that the corporate debtor’s valuation at only ₹40 crores, against admitted debts of about ₹2,300 crores, was based on incomplete information. It was submitted that the Resolution Professional (RP) failed to take control of and secure information regarding the subsidiaries, despite repeated non-compliance by the suspended directors under Section 19(2) of the Insolvency and Bankruptcy Code (IBC). This, it was argued, undermined the integrity of the CIRP and the valuation process.
The applicant further contended that the RP’s own White Paper acknowledged substantial investments—approximately ₹448 crores—in subsidiaries and step-down subsidiaries, yet these were not reflected in the valuation. It was argued that the lack of financial information from the suspended directors led to undervaluation, low-value bids from prospective resolution applicants (PRAs), and an approved resolution plan offering only ₹51 crores against claims exceeding ₹2,300 crores, resulting in a haircut of nearly 97%.
The RP, opposing the application, argued that the applicant had no locus standi to challenge the valuation reports and that the purpose of valuation is solely to aid the Committee of Creditors (CoC) in evaluating resolution plans. Once a resolution plan is approved by the CoC, the RP contended, the Tribunal’s scope of interference is limited to verifying compliance with Sections 30 and 31 of the IBC. Citing judgments including Maharashtra Seamless Ltd. v. Padmanabhan Venkatesh, it was submitted that valuation is only for the guidance of the CoC and need not match liquidation value. The RP also relied on Section 18(1)(f) of the IBC, which excludes the underlying assets of subsidiaries from the CIRP estate, arguing that revaluation was barred and unnecessary.
In rejoinder, the applicant clarified that it did not seek valuation of the subsidiaries’ underlying assets, but only the corporate debtor’s shareholdings in these entities, which form part of its asset base. It was emphasized that these shareholdings should have been appropriately valued under Sections 18 and 25 of the IBC to reflect the true financial position of the corporate debtor.
After reviewing the submissions and minutes of several CoC meetings, the Tribunal found that the suspended directors had repeatedly failed to provide necessary financial information despite binding directions under Section 19(2) of the Code. The RP and valuers admitted that critical data was unavailable, leading to the exclusion of subsidiaries from valuation. The Tribunal noted that while the underlying assets of subsidiaries are excluded from the CIRP estate under Section 18(1)(f), the corporate debtor’s shareholding in these subsidiaries is a distinct financial asset that must be valued during CIRP.
The Tribunal held that the valuation reports, which ignored the corporate debtor’s equity investments in subsidiaries due to lack of information, were inadequate. It criticized the RP for failing to take legal or coercive action to enforce compliance, terming it a serious lapse. Given that the RP already had a pending disciplinary proceeding in another matter, the Bench directed that a copy of the order be forwarded to the Insolvency and Bankruptcy Board of India (IBBI) for disciplinary inquiry.
Concluding that the non-consideration of the corporate debtor’s investments in subsidiaries and step-down subsidiaries led to incorrect valuation and materially prejudiced the CIRP, the Tribunal allowed the application. It directed the RP to conduct a fresh, independent valuation of the corporate debtor’s equity shareholding in subsidiaries and step-down subsidiaries in accordance with Regulation 35 of the CIRP Regulations and Section 36(3)(d) of the Code, and ordered the suspended directors to fully cooperate, failing which the RP may initiate contempt proceedings or seek coercive directions.
Appearance
For the Applicant in I.A.636/2023: Shri Sangamithra T.
For the Applicant in I.A.433/2024: Ms. Aneeta Mathew
Cause Title: HDFC Bank Limited V. Opto Circuits (India) Ltd.
Case No: I.A. No. 433 of 2024 IN C.P. (IB) No. 199/BB/2018
Coram: Shri Sunil Kumar Aggarwal [Judicial Member], Shri Radhakrishna Sreepada [Technical Member]
