The Reliance Communication-Ericsson legal battle, which led the Anil Ambani controlled company to the insolvency court, has been a watershed moment not just for reflecting the state of the telecom sector, but also for the effectiveness of the Insolvency and Bankruptcy Code ("the Code").
For a person tracking the development of Insolvency Law, this particular case has evoked a lot of interest as it continues to pose new situations and prod the lawmakers to evaluate the practicality and effectiveness of an otherwise wonderful regime. To start with, it was a unique case where the Corporate Debtor was taken to the insolvency court by a disgruntled operational creditor despite the financial creditors of the Corporate Debtor rallying in support behind it. The Financial Creditors, despite the risk to their investment and classification of account as NPA, were opposed to insolvency proceedings being initiated and were trying to work out a settlement which in their assessment would have fetched them a better recovery on their exposures. That is where the (over) simplification of the process played a villain.
Over the last 2 years, the Legislature, Government, the Insolvency and Bankruptcy Board (IBBI} and the Hon'ble Adjudicating Authorities have all worked towards making the provisions of the Code simpler and efficacious to deliver on the stated purpose. Towards this end the process has been streamlined and frivolous objections, raised solely to delay the process, have been done away with. By the time the Ericsson application landed before the Hon'ble Adjudicating Authority, Mumbai it had repeatedly held that if the insolvency application meets the 3fold test as prescribed in the Code i.e. the application being complete, there being default, and there being no disciplinary proceedings against the nominated Insolvency Resolution Professional (IRP), the application ought to be admitted. Any extra consideration, whether positive or negative, related or unrelated, has to be ignored to ensure the object of the Code of time bound resolution.
This is where RCOM faltered. It for sure didn't not have the ability to honour its debts both to operational and financial creditors. However, it was working out an arrangement whereby major assets were being sold to elder brother's Jio lnfocom and proceeds were to go for payment of creditors. All the financial creditors were onboard this plan as it gave them a view of expected realisation than what they would have had realised following the CIRP. But just when everything was going as per plan, Ericsson put a spanner in the wheels and derailed the entire plan.
The admission of insolvency petition against RCOM by the Hon'ble Adjudicating Authority also raised a pertinent question regarding the eligibility of Mukesh Ambani's Jio infocomm to participate in the Insolvency proceedings of the RCOM. The amendment brought in January 2018, the Code prevented promoters and their relatives to come in as resolution applicants and regain control of Corporate Debtor. While this was done to encourage fiscal discipline and to keep unscrupulous people away, the way the disqualification was defined even prevented the richest person in India to take control of estranged brothers RCOM. Given the bitter acrimony at onetime and the fact that both manage separate businesses, such a restriction by virtue of their blood relation was grossly absurd. Moreover, given the situation of the telecom industry it was unlikely that any other bidder would have the intention or the might to take over RCOM thus leaving the assets to rot and reducing any chances of recovery that the banks otherwise had.
Another strange development that has taken place in the matter is the intervention of Hon'ble National Company Law Appellate Tribunal (NCLAT) to stay the insolvency proceedings1 in view of the settlement taking place between RCOM and Ericsson. The Hon'ble Adjudicating Authority as well as Appellate Tribunal i.e both NCLT and NCLAT have refrained from using their inherent powers and restricted themselves to powers expressly bestowed under the Code and rules and regulations contained therein. Insolvency being a time bound process, a stay application suspending the CIRP is usually not allowed. On the contrary extensions of IRP, RP, resolution plan timelines, etc. are generally extended to as to ensure that the object of the code is met. In fact, in the matter of Lokhandwala Kataria Construction Private Limited vs. Nisus Finance and Investment Manager LLP2, the Hon'ble Appellate Tribunal, specifically held that it does not have power to allow withdrawal of application after it has been admitted as there is nothing on record to suggest that it can use its inherent power under Rule 11 of the NCLAT rules to decide upon Insolvency Petitions. Though the Supreme Court also concurred with the view of the NCLAT, it did nudge the government and the board to make suitable amendments from preventing such petitions from coming directly before the Supreme Court invoking extraordinary jurisdiction under Article 142.
However, in the RCOM matter, when faced with the situation that all the creditors including Ericsson, on whose application the insolvency petition was admitted, were willing for a settlement, the Hon'ble Appellate Tribunal (maybe due to vacation) stayed the insolvency proceedings in the pendency of the appeal and directed RCOM to sett le the matter with Ericsson. The ex-management was again handed over the reins of the company and RCOM was even allowed to conclude asset sale during the period of stay. A careful perusal of the order of the Hon'ble Appellate Tribunal reveals that it raises more questions than it answers.
Vide the order dated 30.05.2018, the Hon'ble Appellate Tribunal have directed the IRP, who also has been allowed to continue to attend office of RCOM, to allow the ex-management to function. Such directions are quite interesting as though the insolvency proceedings are stayed, the IRP continues to function.
Also, it is not RCOM but its lenders who have been allowed to sell the assets and appropriate the proceeds thereof. Furthermore a sum of Rs.550 crore is directed to be paid to Ericsson within 120 days failing which the appeals will be dismissed. Again quite interestingly, it is only the interests of Financial Creditors and a single operational creditor which is being addressed by the intervention of the Hon'ble Appellate Tribunal and the interests of all other stakeholders have been ignored. Should the insolvency proceed or is set aside, all the other creditors would also stand a chance to file their claims. However, in the present situation it is only Ericsson who gets it money and the lenders, who gets to sell the assets and appropriate the proceeds. The Insolvency proceedings were initiated on 15.05.2018 and stayed on 30.05.2018 and during this time a lot of claims would be have been received by the IRP following the public announcement. The fate of such claims and the one's being received after the proceedings are stayed is uncertain and open to speculation.
Furthermore, should the Appeals be dismissed eventually, the insolvency will proceed and the amount paid to Ericsson or the amount realised by sale of assets will stand credited back to the account of RCOM. Such a situation is also bound to create confusion as it may lead to a situation wherein the accounts of the Corporate Debtor are flush with funds and yet cannot be appropriated by its lenders against their dues. Also, it will be against the object of the Code as there might be nothing left in RCOM for any potential resolution applicant and the only option that might be left would be to liquidate.
Even procedurally, the order of the Hon'ble Appellate Tribunal, though welcomed by all stakeholders and unlikely to be challenged, drifted away from the position held thus far. Till the RCOM interim order by Hon'ble NCLAT, any settlement post admission of insolvency were either effected by the Hon'ble Supreme Court or accommodated by Hon'ble NCLAT while setting aside the Hon'ble Adjudicating Authority orders in view of some flaw and not remitting it back in view of the settlement.
In retrospect, the Hon'ble NCLAT decision finds itself on stable ground in view of the recent amendment to the Code vide the ordinance dated 06.06.2018. The ordinance stipulated that even post admission, insolvency proceedings can be withdrawn upon the same being approved by a vote of 90% of COC. Considering the fact that the COC only consists of Financial Creditors, their consent to withdraw is what is required. In the case of RCOM, all the financial creditors appearing in the matter were amenable to settlement and wanted the Insolvency proceedings to be set aside.
In effect, while deviating from ordinary practices, the Hon'ble NCLAT actually took a pragmatic decision in suspending the insolvency proceedings in which no party was really interested in. The same now even has backing in law in view of the amendments brought in by the recent ordinance. Given the fact that the Code is a new enactment and jurisprudence is still evolving, there will be umpteen number of unforeseen situations that will have to be addressed on a day to day basis and cannot wait for an amendment to be promulgated. Ergo, it is the need of the day that the inherent powers of the tribunals be extended to the proceedings under the Code to tackle such unforeseen situations and ensure that the Code remains fit for purpose and any absurdity due to absence of specific provision is avoided.
1. 0rder dated 30.05.2015 in Company Appeal (AT) (Insolvency) Nos. 255-256 of 2018
2. Company Appeal (AT)(Insolvency) No. 95 of 2017
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