Step-Down Subsidiary Cannot Use 'Colourable Means' To Extract Holding Company Assets In Liquidation: NCLT Chennai

A step-down subsidiary cannot use indirect or colourable means to extract assets or establish parallel claims against its holding company undergoing liquidation, the National Company Law Tribunal, Chennai, held. 

The tribunal made the observation while dismissing an application filed by St. John Lines PTE Limited against the liquidator of its holding company, St. John Freight Systems Limited.

A coram of Judicial Member Jyoti Kumar Tripathi and Technical Member Ravichandran Ramasamy observed:

“We are of the considerable view that a subsidiary, let alone a step-down subsidiary, cannot be permitted to use colorable means to extract assets or establish parallel claims against its holding company under liquidation. What cannot be done directly cannot be done through colourable actions indirectly which is against the very objective of IBC, and against the larger the interest of the stakeholders.”

The subsidiary filed an application against the holding company, seeking container rental charges of about USD 3.79 million (₹31.98 crore), bill of lading usage charges of USD 3.60 lakh (₹3.04 crore), and return of marine containers, alleging that they had not been returned after the corporate insolvency resolution process commenced.

The dispute concerned 800 marine containers originally leased by St. John Freight Systems Limited from Cronos Containers Limited, UK. According to the applicant, the lease agreements were later amended to substitute it as the lessee, while the corporate debtor continued handling the containers in India as its agent under an agency agreement.

It alleged that after the insolvency process commenced on December 10, 2018, the liquidator failed to return the containers, continued deriving revenue from their use, and unlawfully used its bills of lading, causing financial losses.

Opposing the application, the liquidator contended that the corporate debtor had ceased to be the lessee in December 2012, the containers did not form part of the liquidation estate, the claims were raised at a belated stage, and disputed the validity of the Agency Agreement relied upon by the applicant.

The tribunal noted that the applicant had earlier filed claims before the resolution professional, which were rejected, and that the corporate debtor had already been sold as a going concern.

“At this belated stage of the liquidation process, the claims raised by the applicant, which is a step-down subsidiary of the Corporate Debtor, cannot be considered or entertained.”, the tribunal ruled.

The tribunal also found that there were no reliable documents to establish that the corporate debtor owned or was lawfully in possession of the containers when the insolvency process commenced.

The tribunal further examined the Agency Agreement and found significant discrepancies between different versions produced by the applicant, including differences in corporate seals and signatures.

“Since the sole basis of the applicant's status and claim as an agent of the Corporate Debtor rests upon this Agency Agreement, and since the said document is found to be wholly unreliable, no reliance can be placed upon such documents," the tribunal noted.

Holding that what cannot be done directly cannot be done indirectly through colourable means, the tribunal found the applicant's claim to be without substance and dismissed the application.

For Petitioner: Advocates K Pawan Jhabakh, R Vishnu Jayaram and K.M Ashif

For Respondents: Niranjan Sankar Rao