Why Are Mutual Funds Marching To The National Company Law Tribunal?
Back in 2011, Wockhardt Ltd.'s unsecured bondholders made history by getting the court to put them almost on a par with the company's secured creditors. The winding-up petition filed by the bondholders forced Wockhardt to repay their dues.
With India Inc's continuing debt woes, now, it's Mutual Fund Asset Management Companies (AMCs) that are choosing to take pre-emptive measures and are upping the ante against companies they have exposure to. In what marks a first, two mutual funds have taken a company to court for defaulting on maturity proceeds on its debt instruments.
Recently, Taurus Mutual Fund took Avantha Holdings Ltd. to the National Company Law Tribunal (NCLT) when its subsidiary Ballarpur Industries Ltd. (BILT) failed to repay Rs 100 crore in commercial paper debt issued to the fund house. IDBI Mutual Fund too moved the tribunal in Mumbai against BILT for delay in interest payment, a person involed in the litigation told BloombergQuint.
While IDBI Mutual Fund did not respond to BloombergQuint's queries, IDBI Trusteeship Service's half-yearly report dated April 11, 2017 offers some insight on the default. The report mentions a default of Rs 150 crore categorised as default in interest payment on a secured debenture issuance by BILT.
The Company (BILT) has not paid interest to debenture holder for quarter ended January 12, 2017. The lenders of the company have former JLF (joint lender forum) and opted for SDR (Strategic Debt Restructuring). Further, the company informed the debenture holder that the JLF has called for standstill and hence it will not be able to pay further payments till the finalization of Strategic Debt Restructuring Scheme.IDBI Trusteeship Service, Half Yearly Report, April 11, 2017
In the BILT-Taurus matter, the premise of the application is a corporate guarantee issued by the holding company, Avantha Holdings, a person closely involved in the litigation told BloombergQuint, requesting anonymity. The short-duration commercial paper was issued by BILT and the proceeds were due in February; since BILT failed to make the payment, Taurus invoked the corporate guarantee by Avantha but even the parent defaulted, this person added.
A corporate guarantee falls squarely within the ambit of financial debt, Fereshte Sethna, a partner specialising in insolvency law at DMD Advocates, said.
A financial debt gives rise to a financial creditor who is entitled to bring proceedings before the NCLT for a insolvency resolution and liquidation process. The amendments to the Companies Act, 2013, by giving effect to the Insolvency and Bankruptcy Code, have made way for a rather aggressive regime from a standpoint of recoveries, compared to what existed earlier.Fereshte Sethna, Partner, DMD Advocates
Under the Insolvency and Bankruptcy Code (IBC), any financial default can trigger an insolvency resolution process. The applicant can be a financial creditor, an operational creditor or the company itself.
Sethna said that under the old Companies Act, a creditor could seek winding-up of a company on the premise of a commercial insolvency i.e. inability of a company to pay its debts as and when they become due. But under the IBC, she added, it's not a winding-up but a resolution process that gets initiated.
It's a far more simpler process. You have to only establish a financial default and insolvency kicks off immediately. A winding-up petition under the old Act involved an admission of a petition, an advertisement and then a final hearing. The current provisions are far more swifter and aggressive that probably make more economic sense for AMCs compared to the earlier regime.Fereshte Sethna, Partner, DMD Advocates
Sitesh Mukherjee, the disputes resolution head at Trilegal, attributed this strategy of AMCs to banks ignoring the interest of smaller creditors.
Someone with an exposure of Rs 10,000 crore has a much deeper interest in restructuring the debt and ensuring that the company is able to pay the entire amount over a period of time. The smaller lenders have a feeling that the reworked schemes will only protect the interest of large creditors and the lowering of the threshold has meant that the bargaining power that smaller lenders had has been effectively reduced.Sitesh Mukherjee, Head-Disputes Resolution, Trilegal
The bargaining power Mukherjee referred to stems from the Reserve Bank of India's guidelines, issued last month, that reduce the minimum votes required in a joint lender forum to reach a decision.
Naturally, the AMCs are heading to the NCLT to pre-empt any potential steam-rolling by the larger creditors, Mukherjee said.
A mutual fund won't like to wait for 10 years to get its money back versus a bank that may lend even more money to a company to make it viable. The smaller creditors would want a judicial determination of a restructuring scheme and that whether it is equitable for all creditors. Though if the largest lenders stand behind a scheme, the court will take that into consideration but at least the mutual funds will have an opportunity to agitate their case that the scheme is just pushing the problem.Sitesh Mukherjee, Head-Disputes Resolution, Trilegal
Experts quoted in this story also pointed to another theory – use the insolvency process as a leverage to settle the dues out of court. This is going to be the course of action by AMCs if the larger banks continue to ignore the interests of smaller creditors, they added.
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