IBC: The Five Legal Twists An RCom Insolvency Faces
Will an RCom insolvency get Anil Ambani a better deal?
Regulatory hurdles in the sale of spectrum, a persistent operational creditor in Ericsson, a deal with white knight Reliance Jio, but only on paper, and a board that wishes to overstay its welcome—Reliance Communications Ltd.’s insolvency process promises to be a roller-coaster ride for stakeholders as well as the courts. Thus, the decision of RCom’s board to opt for voluntary insolvency under the Insolvency and Bankruptcy Code, 2016, raises several questions:
- What does the board of RCom mean when it says it will propose a plan under the insolvency process similar to what it was pursuing outside of it?
- Will RCom’s current deal with Reliance Jio Infocomm Ltd. hold under an insolvency process? Will Jio, founded by Mukesh Ambani—the brother of RCom promoter Anil Ambani—be allowed to bid for the insolvent telecom company?
- How would the insolvency process treat the sticky issue of RCom’s dues to the Department of Telecommunications—the biggest hurdle in RCom’s spectrum deal with Jio?
- Is operational creditor Ericsson likely to recover its dues or get any preference under the IBC after favourable court rulings so far?
But first, a quick recap of what’s happened so far.
RCom’s Debt Woes: Recap
Reliance Communications, Reliance Telecom Ltd. and Reliance Infratel Ltd. owe nearly Rs 1,500 crore to operational creditor Ericsson. After Ericsson failed to recover its dues, it filed bankruptcy proceedings against the three entities at the National Company Law Tribunal in May last year.
The tribunal allowed for initiation of the insolvency process against the three companies on grounds that the existence of debt and default were indisputable. But the appellate tribunal stayed the order. Since then, RCom tried but failed to close a deal with telecom service provider Aircel Ltd., unsuccessfully tried the strategic debt restructuring route, struck a deal with Jio to sell key telecom assets but has since made little progress in convincing the DoT to approve its spectrum sale to Jio.
Fourteen months after the deal with Jio failed to close, despite an extension, RCom, having boasted that it would exit the strategic debt restructuring with no lender haircuts on its Rs 47,000 crore debt, said it would file for insolvency instead.
The RCom statement said that:
- The existing plan had been frustrated by “untenable issues” raised by DoT and numerous litigations before high courts, Telecom Disputes Settlement and Appellate Tribunal and the Supreme Court, which can now be resolved under the NCLT process.
- Challenges raised by “unreasonable” minority lenders can be now be overcome through the NCLT’s 66 percent majority rule versus the need for 100 percent approval in any other process.
- The board expects “substantial unsustainable debt and liabilities to stand extinguished under the NCLT process”.
The RCOM Board therefore sees a fast-track NCLT resolution in 2019, free of all uncertainties and challenges.RCom Statement (Feb. 3, 2019)
But there are five legal twists this insolvency process will have to overcome.
1. Voluntary Insolvency Filing
An application for voluntary insolvency needs to be approved by 75 percent shareholders, Murtaza Somjee, banking and finance partner at law firm Jerome Merchant + Partners, told Bloomberg Quint. With the promoter holding at 53 percent, Anil Ambani needs at least 22 percent of the public shareholders voting to back the insolvency proposal. Besides, the process will take at least 30 days, Somjee said.
Possibly to sidestep this process RCom tried another route on Feb 4. It moved the NCLAT to withdraw its objection to an earlier insolvency filing made by one of its unpaid suppliers, Ericsson. At the time of the filing RCom had objected to the insolvency petition. Now it was Ericsson’s turn to resist in light of the favourable Rs 550 crore order it has received since then. Of course, RCom has yet to pay Ericsson that money and recently faced contempt action by the equipment maker.
If it isn’t able to revive the existing insolvency process, RCom will have go through the process of a voluntary filing.
2. The RCom Board’s Curious Expectation
In the statement issued on February 3, RCom made two curious assertions.
i) That its management will “propose a similar Debt Resolution Plan in the NCLT process, as was earlier being pursued outside NCLT”. And that key elements of the debt resolution plan will remain “unchanged”, including sale of all telecom infrastructure assets and spectrum, strategic monetisation of GCX, IDC & Indian Enterprise Business, development of 30 million square feet at the Dhirubhai Ambani Knowledge City complex and sale of other real estate assets.
It’s not clear why RCom believes it can dictate terms in an insolvency. Once an insolvency application is accepted the committee of creditors and resolution professional appointed by them are in charge.
ii) RCom’s statement also said its board will “actively participate”in the NCLT resolution process, without voting rights, adding that it's seeking to achieve a "fast-track NCLT resolution in 2019, free of all uncertainties and challenges".
In order to state this the board may have relied on a recent ruling by the Supreme Court in the Vijay Kumar Jain case where the court held that members of erstwhile board of directors, being vitally interested in resolution plans that may be discussed at meetings of the creditors, must be given a copy of such plans.
Somjee pointed out that at best, RCom’s management and board, both stand suspended in an insolvency process, can cooperate and play a positive role in achieving a resolution if all parties involved remain the same. But if a new resolution applicant enters, it would definitely change the course of direction from what it presently appears to be, Somjee added.
3. Can Elder Brother Mukesh Ambani Come To The Rescue?
The spectrum sale deal between Anil Ambani’s RCom and brother Mukesh Ambani’s Reliance Jio has been pending due to regulatory hurdles since December 2017.
If RCom undergoes insolvency resolution can Jio make a bid for the company?
Section 29A of the IBC lists eligibility criteria for bidders or resolution applicants. It bars related parties and connected persons of a defaulting corporate debtor from participating in the resolution process.
Recently, in the Swiss Ribbons case, the apex court clarified the definition of relative/related person to mean persons who are connected with the business activity of a resolution applicant. In the absence of showing that such a person is connected with the business activity of the ineligible resolution applicant, such a person cannot possibly be disqualified, the Supreme Court had said.
According to Amir Arsiwala, an insolvency lawyer and independent practitioner, the apex court ruling could mean that an entity that would otherwise be considered “related” to RCom, but which isn’t involved in its business affairs, could escape the bar of section 29A.
However, the full extent of the Supreme Court’s ruling is yet to be tested in application to an ongoing case. So far, the court has only dealt with this aspect in a hypothetical scenario whilst testing the provision’s constitutional validity, he said.
Reliance Jio, which is certainly under the control of a “related party” to the management of RCom, could nonetheless escape from the ineligibility of section 29A by claiming to not be related to its business activities. However, public records indicate that RCom and Reliance Jio had extensive business dealings, so the actual application of section 29A would have to be tested in this light.Amir Arsiwala, Litigator, Bombay High Court
On the other hand Somjee said that if Reliance Jio intends to submit a resolution plan, it should be able to. To avail the Swiss Ribbons exemption, a relative or related party needs to be "connected with the business activity of the resolution applicant", which isn't the case here, he said.
To be sure, so far the deal with Jio involved certain RCom assets. Can that same deal be offered in an insolvency or will Jio have to acquire all of RCom?
IBC intends that post resolution, the insolvent company should continue on a going concern basis, so acquisition would be the logical route, but a combination of the two is possible as well, Somjee said.
However, other lawyers believe that a resolution applicant cannot cherry-pick assets.
4. Will DoT Play Ball Under IBC?
Another hurdle that the RCom insolvency resolution process may face is the issue of DoT dues. The Department of Telecommunications has withheld approval for sale of the company’s spectrum to Reliance Jio pending a payment security from RCom. The matter has been in litigation before various legal fora.
On Feb. 4, the TDSAT passed an order favourable to RCom, holding that certain spectrum charges were illegally imposed on RCom, directing DoT to return RCom’s bank guarantee of Rs 2,000 crore. But the department is yet to provide its clearance for RCom-Jio deal. It's not clear if it still demands security for other past dues. If so, then will the department consent be forthcoming as part of the insolvency proceedings?
Arsiwala is unsure if IBC can help RCom cross this regulatory hurdle since the law requires a resolution plan to not be in contravention of any law that is in force.
It's a difficult position to argue that a resolution plan under the IBC can mandate the grant of regulatory approvals or that consent of regulators can be presumed simply by virtue of the code, Arsiwala said.
However, there could be some benefits, Somjee pointed out.
IBC mandates a time-sensitive implementation of the resolution plan, because of this, the authorities can be expected to be more responsive to the same both from a time perspective as well as the fact that it’s a statutory resolution under supervision of the NCLT and in a way under constant scrutiny.Murtaza Somjee, Insolvency Head, Jerome Merchant + Partners
5. Ericsson’s Fate?
The Supreme Court had given RCom a "last opportunity" to pay Ericsson’s settlement dues of Rs 550 crore plus interest by Dec. 15, 2018. Since RCom didn’t pay up, this January Ericsson filed for contempt proceedings, seeking jail time for Anil Ambani.
Will an insolvency resolution process hurt Ericsson’s chances of getting its money back? While the NCLAT and apex court allowed it to recover a third of its dues, in an insolvency process Ericsson would be on par with any other operational creditor. Arsiwala said that once admitted, RCom’s insolvency will not change the priority of payment.
The orders of the Supreme Court and the NCLAT aren't of such nature to give Ericsson a right to demand its payment in priority outside the resolution process, Arsiwala explained. However, this wouldn't stop the Supreme Court from continuing to head the contempt proceedings filed by Ericsson against RCom’s management, he said.
Somjee agreed and said that once RCom’s insolvency application is admitted, the moratorium would come into play, and going forward Ericsson and the liability owed to it would be treated on par with other operational creditors.