LL: Reliance vs Ericsson: Unsecured Creditor Walks Away With Money; Banks Clueless About Recovery

21 March 2019: In the scheme of the Insolvency and Bankruptcy Code, the claims of operational creditors rank lower than the claims of secured financial creditors.

But in the recent Reliance-Ericsson dispute, the unsecured operational creditor managed to upstage the financial creditors. 

Ericsson Indian Pvt Ltd, an operational creditor of Reliance Communications, has managed to claim nearly 50% of its dues by going through the IBC route while the Joint Lenders Forum(JLF) led by the State Bank of India are still groping in the dark to figure out means to recover their dues worth Rs 46,000 crores.

This is despite the JLF, being a consortium of secured financial creditors, having preferential claims over Ericsson. So how did this bizarre turnaround happened?

Ericsson had initiated insolvency process against RCom in NCLT Mumbai for its dues of nearly Rs 1150 crores. The NCLT admitted the application on May 15, 2018 and initiated Corporate Insolvency Resolution Process against three Reliance companies :- Reliance Infratel Ltd, Reliance Telecom Ltd and Reliance Communications. Moratorium was declared overReliance assets and interim resolution professional was appointed.

This order of NCLT was challenged before NCLAT. Before the NCLAT, the bankers forum took a stand that they will not stand to gain from insolvency process. They pressed for stay of insolvency process and requested that they be permitted to recover the dues by selling the secured assets. Because of the moratorium of NCLT banks are not in a position to recover the amount and there is recurring loss of more than crores per day, the lenders pleaded.

The NCLAT recorded the submission made by Thushar Mehta, the counsel for JLF, as follows :

“Mr. Tushar Mehta, learned Senior Counsel for the ‘Joint Lenders Forum’- (‘Financial Creditors’) submitted that they have reached an agreement with the ‘Corporate Debtors’ for sale of assets of the ‘Corporate Debtors’, pursuant to which,the ‘Financial Creditors’ can recover a sum of Rs.18,100 crores approximately. He further submits that on re-structuring and sell of assets, the ‘Financial Creditors’ can recover Rs. 37,000 Crores approximately”

The corporate debtor Reliance admitted the liability to Ericsson and agreed to settle the dues for Rs.550 crores. Ericsson accepted this settlement. On basis of these developments, the NCLAT passed order on May 30, 2018 staying the insolvency process and permitting the banks to liquidate the mortgaged assets. The sum recovered by sale of assets was to be deposited in the SBI for an on behalf of all creditors, subject to the outcome of the appeal. Also, Reliance was directed to pay Rs.550 crores to Ericsson as undertaken within 120 days.

As a result of this, the erstwhile management of RCom continued in the saddle; the corporate insolvency resolution process was stayed until further orders; the financial creditors’/Joint Lenders’ Forum was given liberty to sell assets of the corporate debtors and to deposit the amount so received in an account of the lead bank, i.e., SBI.

After that, Reliance approached the Supreme Court, seeking to quash the insolvency process against it on the basis of settlement with Ericsson. The Reliance Chairman Ambani made a personal undertaking before SC to settle the dues of Ericsson by September 30, 2018. This undertaking was violated, leading to contempt petitions being filed by Ericsson, which culminated in order passed by the bench of Justices R F Nariman and Vineet Saran on February 20 holding Reliance companies guilty of contempt. Anil Ambani was given four weeks time to pay the amount to Ericsson, failure of which would have meant three months prison for him. On May 18, a day before the SC deadline, Ambani paid the dues to Ericsson.

Thus, Ericsson, which would have stood last in the queue in the insolvency process, recovered almost 50% of the dues.

Meanwhile, what is the status of the banks, which had pressed for stay of insolvency process against Reliance on the ground that they have reached an agreement with Reliance for sale of assets expecting a return Rs.18,100 crores?

Last week, the bankers forum drew the ire of the NLCAT bench, which orally remarked to the effect that they ‘messed up’, after noting that the sale plan turned out to be a failure.

“You (SBI) have failed. JLF has failed. No sale took place. You clapped with RCom and claimed that you would recover around Rs 37,000 crore from sale to Jio. You cited losses of crores per day. You failed and now will seek to recover Rs 260 crore”, the bench reportedly observed.

This sharp rebuke came when the bench was considering an  application by Reliance seeking a direction to the SBI to release the income tax refund of Rs.260 crores held by it to enable RCom to pay Ericsson. The lenders opposed this application stating that they have not been able to sell off the secured assets through the “asset monetization process” as per the earlier agreement with RCom.

The NCLAT bench also asked why “proceedings against them (lenders) should not be initiated” for misleading the tribunal by giving a “golden outlook” to recover around Rs 37,000 crore from sale of assets to Reliance Jio Infocomm.

In this regard, it may be noted that the SBI had informed Reliance in September last year that the lenders have no objection in RCom utilizing the proceeds from the proposed sale of spectrum to Reliance Jio to settle the dues to Ericsson. The SBI also clarified that no objection was expressed to enable “RCom to come out of the IBC proceedings”. 

This letter issued on September 27, 2018 came to bite back SBI-led forum when it was used by Reliance’s counsel in NLCAT last week to argue that lenders are estopped from objecting to release of the income tax refunds for paying Ericsson.

The deal between RCom and Jio did not fall through, as Department of Telecommunications raised objections, and last Monday the cancellation of the deal was announced.

Commenting on the predicament of the lenders, columnist Andy Mukherjee of Bloomberg said; “When a history of the early years of India’s 2016 bankruptcy code is written, Ericsson’s lawyers will deserve a glowing mention. For an unsecured creditor to walk away with a 48 percent recovery of its claim – while secured lenders wait patiently for RCom to sell its spectrum, redevelop its land assets and pay them something – shows that the Swedish firm played its cards well”

Now, with reports of RCom itself filing for insolvency, things are bank to square one, and the SBI-led lenders forum might be ruing their decision to opt for out-of-court restructuring of debts instead of insolvency process.

This situation also raises questions about the assessment carried out by the banks before disbursing loans to the tune of Rs.46,000 crores to Reliance group. The lenders’ consortium, which includes public sector banks such as SBI, Bank of Baroda, Canara Bank, UCO Bank etc., are bound to take depositors and taxpayers into confidence by chalking out a concrete plan to recoup these bad debts.

The Live Law reported

BT: SBI asks Naresh Goyal, his wife, two directors to step down from Jet Airways board as airline’s financial woes deepen

21 March 2019: It may soon be an end of the road for cash-strapped Jet Airways, as it fails to come out of the existing financial crises. After reports that Etihad was more interested in exiting the company than helping it revive, state-owned State Bank of India (SBI) has now said it would be in everybody’s interest that Jet Airways continues to fly.

The bank has asked Naresh Goyal and three other company directors to step down from the Jet Airways board. SBI has, however, not shown much enthusiasm in buying 24 per cent stake reportedly offered by Jet’s UAE-based partner Etihad. The Gulf carrier, a jittery participant in recent bailout discussions, signalled its decision to exit Jet after a meeting between its CEO Tony Douglas and SBI Chief Rajnish Kumar.

The Bank-led Resolution Plan (BLRP), approved by Jet’s shareholders in February, is being piloted by SBI. Despite deep financial crunch and its declining fleet of aircraft, the airline can be brought back into life provided instant cash is pumped into it, said a government official, as quoted in the Economic Times. While the SBI is bending the RBI rules to save the troubled Jet Airways, its efforts can only fructify if Naresh Goyal agrees to accept the terms and conditions put forth by the bank.

So as per the Memorandum of Understanding (MoU) between Jet, lenders and Ehitad, Naresh Goyal along with his wife Anita Goyal, Executive Director Gaurang Shetty and Independent Director Nasim Zaidi will need to quit the Jet Airways board to become eligible for fresh funding. However, if Goyal sticks to his earlier stance of leaving an option open for making a comeback in future, the matter will complicate further as non-payment of salaries and rental for lessors are becoming a continuous headache for Jet.

If the situation persists, the company is staring at another payment default of $109 million by March 28. Jet Airways has to pay $109 million of total $140 million loan it had taken from HSBC Bank Middle East, in which Etihad was a guarantor. Jet had also defaulted on its earlier payment of $31 million to HSBC as part of its external commercial borrowings. With the SBI-led resolution plan yet to see the light of the day, Jet Airways is likely to default to another tranche.

Though experts suggest filing for bankruptcy would be a lasting solution of Jet Airways’ woes, many also believe the government would unlikely allow this to happen at a time when the General Elections 2019 are around the corner.

Jet going for bankruptcy would mean thousands of job losses, and it would send the aviation sector into a tailspin. For an election-bound government, saving Jet is crucial because no government would want a trained workforce of 16,000-odd people to lose jobs overnight, they believe.

The harried pilots of Jet Airways are approaching rival airlines like SpiceJet and IndiGo for employment. Jet Airways pilots had earlier been wooed by IndiGo with compensation for their pending salaries and other benefits, leading to murmurs of protests from its own pilots. The salaries of Jet Airways pilots, engineers and senior officials have been pending for over three months now. They have warned they will stop flying from April 1 if the management failed to provide clarity on the revival plan along with a deadline to clear their salary dues by March 31.

The Naresh Goyal-led company owes over Rs 8,500 to a consortium of banks led by the SBI. The troubles for the airline started last year when its pending payments due to cancelled flights swelled up to Rs 3,500 crore. Since then there has been a continuous delay in disbursement of its employees’ salaries, and the airline’s fleet has also reduced to 35 from 119 due to the non-payment of rentals to lessors. Jet Airways now operates 150 flights a day, a sharp decline from 450 when it used to fly with full capacity.

The Business Today reported

IBT: Nearly 260 Jet Airways pilots appear for SpiceJet interview ahead of April 1 strike

21 March 2019: About 260 pilots of the crisis-hit Jet Airways have reportedly appeared for an interview with SpiceJet, the only other Indian carrier that operates the Boeing 737 planes. Of the 260 pilots who appeared for an interview in Mumbai on Wednesday, March 20, 150 are said to be captains.

The move comes days before the April 1 deadline that the pilots have set to stop flying for Jet unless their dues are cleared or a letter of intent is signed saying that their dues will be cleared. The staff — pilots, aircraft engineers and the senior management — is known to have three months of payment due.

About 260 Jet Airways pilots including 150 captains appeared for SpiceJet pilot interview held in Mumbai Wednesday,” the Times of India quoted its sources as saying. Not just SpiceJet, IndiGo is also trying to hire Jet’s pilots and is said to have been offering profitable salaries.

Jet’s loss, SpiceJet’s gain

Meanwhile, it is not just Jet’s pilots that may soon be flying for SpiceJet. Several Boeing 737 aircraft — previous generations — have been grounded by Jet due to non payment to lessors and most of the lessors have reportedly not deregistered these planes in India yet. It is, hence, now being said these planes may be offered to SpiceJet.

“Last Saturday, three companies that leased Boeing 737 NG (new generation, not Max) to Jet and grounded them for non-payment met SpiceJet chairman Ajay Singh. The aircraft are in India and in terms of processes it is easier to deregister them from Jet’s name and lease them to SpiceJet so that they can start flying the planes at the earliest,” sources told TOI.

This would, in turn, work in favour of SpiceJet, which has already been forced to ground 12 737 Max aircraft after the model has been banned in most parts of the world in light of the two air crashes involving the Max in the last five months that claimed about 350 lives.

“We have to make good the 12 grounded Max so these many planes we will like to have on board as early as possible. The grounded B737s are being offered for dry lease (without operating crew) for one to 3 years at good rates,” TOI quoted a SpiceJet source as saying.

“The overall lease rentals for B737 NGs has gone up since the grounding of the Max due to which everyone is now looking for the non-Max B737s. Once the deal is finalised, Jet’s livery will be removed from these planes and they will adorn SpiceJet livery.”

Jet Rescue plan 

After the National Aviators Guild (NAG) wrote to Prime Minister Narendra Modi talking about their dues and how Jet Airways may be on the “verge of collapse,” the government has asked banks to take all the measures possible to save the carrier. In tune, state-owned banks including the State Bank of India and Punjab National Bank are said to be trying to work out a plan to save the brand.

However, promoter Naresh Goyal, his wife Anita Goyal and the directors nominated by Naresh will be asked to step down from the board, sources told Business Standard.

The buzz around how Jet could be taken to insolvency is also gaining momentum. The Insolvency & Bankruptcy Code (IBC) would not just lead to Goyal being shown the doors, but will also help the brand realise its market value. Experts also believe that it would make more sense for Jet to be owned by a new promotor than being controlled by lenders, who are known to be inexperienced when it comes to the aviation industry.

IBT Times reported

NIE: Leave now, lenders tell Naresh Goyal

21 March 2019: Alarmed by the speed at which Jet Airways is flying from bad to worse, lenders of the crisis-hit airline led by the State Bank of India have asked chairman and promoter Naresh Goyal and his management team to step down with immediate effect. They have also told him to reduce his stake in the company from 17 per cent to 10 per cent. 

“The lenders have made their case clear. The plan is to overhaul the management with Naresh Goyal stepping down. They are ready to give time till March 24 for Jet Airways to come up with a better proposal. Else, the Committee of Creditors is likely to take hold,” a senior finance ministry official said. 

SBI chairman Rajnish Kumar on Wednesday met Finance Minister Arun Jaitley along with Aviation Secretary Pradip Singh Kharola and Principal Secretary to Prime Minister Nripendra Misra. Kumar said the meeting was to apprise the government of the dynamic situation. 

Sources said the reason why bankers are wary about Insolvency and Bankruptcy Code is because most of the loans were given against brand value without any tangible collateral. This means, the bankers will not be able to recover any value.

The New Indian Express reported

ET: Jyoti Structures not to face liquidation, NCLAT upholds ultra high-net-worth individuals’ offer

21 March 2019:  Jyoti Structures was saved from going into liquidation after the National Company Law Appellate Tribunal (NCLAT) directed that a resolution plan for the company put forth by a group of ultra high-net-worth individuals led by Netmagic CEO Sharad Sanghi be accepted, albeit with minor modifications.

The company figured in the Reserve Bank of India’s first list of a dozen accounts of non-performing assets (NPAs) referred to insolvency courts. Overturning a July 2018 ruling by the NCLT that ordered liquidation of the engineering procurement construction company on the grounds that the requisite number of creditors had not voted in favour of the Sanghi-led consortium’s plan within the stipulated time frame, the NCLAT noted that though certain banks had initially abstained from voting or voted against the plan, the requisite quorum was achieved, though belatedly.

In an order, a copy of which was seen by ET, NCLAT chairman Justice SJ Mukhopadhaya said that no provision of the Insolvency and Bankruptcy Code bars creditors from changing their minds after voting has been conducted. “The date of approval for resolution plan is fixed by the committee of creditors. They may fix the date of voting and in appropriate case they may extend the period of voting,” Mukhopadhaya said.

Sanghi had appealed against the order to liquidate the company as the investor group led by him had offered to pay around 57% of the company’s dues of Rs 7,000 crore to banks over a staggered period of 15 years.

The NCLAT ordered a modification in the terms of the plan and directed that the offered amount be repaid to the banks over a period of 12 years. Jyoti Structures’ resolution professional Vandana Garg said, “We will be taking up the matter with the NCLT for implementation of the plan”.

Sanghi wasn’t available for comment.

StanChart Bank and Bank of India, which had initially opposed the resolution plan, eventually voted in its favour while Indian Bank, which had abstained from voting later, approved Sanghi’s resolution plan.

Jyoti Structures is a mid-sized company, specialising in power transmission, distribution and EPC projects.

The Economic Times reported

DC: Mukesh Ambani may reap rewards from brother Anil’s telecom troubles

21 March 2019: Mukesh Ambani’s decision to end a deal with his brother—even as he bailed him out—may be an astute business move.

While helping keep his sibling out of prison this week, Ambani also ditched an accord to buy the assets of his brother’s beleaguered telecom carrier Reliance Communications, effectively nudging it toward bankruptcy. With RCom all but sure to head into insolvency proceedings, Ambani may be able to snag those same assets at a discount.

In a last-minute rescue on Monday, Mukesh stepped in to help younger brother Anil pay $80 million in dues to a local unit of Ericsson AB and avert a three-month jail sentence. On the same day, his Reliance Jio Infocomm and Anil’s RCom terminated a 2017 deal that had helped the latter stave off bankruptcy.

With that deal now off, RCom is likely to go into a court-led process that may provide Mukesh’s Jio another shot at buying up the carrier’s airwaves, towers and fiber. What’s more, he may get them for less than the Rs 17,300 crore Jio agreed to pay a year ago given the weak financial health of other telecom operators.

“Jio may have scrapped the asset purchase deal with RCom, but it cannot be ruled out that Jio will try and participate in the purchase,” under the bankruptcy process, said Saurav Kumar, a New Delhi-based Partner at IndusLaw, an Indian law firm. That “may eventually be cheaper for Jio.”

“India’s bleeding telecom sector will probably keep auction prices low,” allowing Jio to spend less on acquiring RCom’s spectrum, Kunal Agrawal, a Bloomberg Intelligence analyst, said.

Emails seeking comment from spokespersons at Reliance Industries and RCom went unanswered.

A lower price for RCom’s assets would mean deeper haircuts for lenders trying to recover some of the $7 billion in debt the unprofitable operator had as of March 2018.

As Anil’s fortunes have nose-dived, Mukesh’s have soared—partly due to enthusiasm about the expansive vision he’s laid out for his consumer businesses. Anil’s net worth has shrunk to about $300 million from at least $31 billion in 2008. Mukesh’s fortune is pegged at $55 billion, by the Bloomberg Billionaires Index.

The Deccan Chronicle reported

TOI: Banks may seek exit of Naresh Goyal, nominees from Jet board

21 March 2019: Lenders to cashstrapped Jet Airways are looking at a change of management as part of a revival plan as the promoters, led by founder and chairman Naresh Goyal, have refused to cooperate and bring money into the company. 

“He wants to retain control without bringing any money,” said a source familiar with the discussions. Goyal’s departure from what was once India’s largest airline was a key stumbling block in talks with the Tata Group as well. Apart from Goyal, his wife Anita, and Gaurang Shetty, who joined in 1996, represent the promoters on the board of directors. Although lenders have not disclosed the plan post the exit of Goyal and his nominees, they are keen to rope in other investors and would prefer domestic players, government sources indicated. Lenders led by SBI had asked the promoters, who own 51% shareholding, to bring Rs 750 crore. 

Sufficient room to revive Jet Airways: SBI chairman

They would have then released a matching amount to keep the airline afloat. But instead of infusing funds, Goyal, who started out as a travel agent, lobbed the ball in Etihad’s court. Etihad has refused to invest any more money in the airline. “We are not concerned with who the promoter is. Our aim is that Jet Airways should not be harmed. There are Rs 4,000 crore worth of creditors and nobody wants to take Jet Airways to IBC (Insolvency and Bankruptcy Code),” said a banking source.

SBI chairman Rajnish Kumar told reporters on Wednesday after meeting finance minister Arun Jaitley that lenders were almost ready with the resolution plan but will need a little more time “because of certain issues”. While he did not elaborate on the reasons, another banker said that Etihad’s refusal to be part of the deal has resulted in further complications. 

“Discussion with Etihad is on. Etihad will take a decision based on its assessment of the situation. It is not that they have decided that they will go out. However, they have certain conditions that the airline should be run in a professional manner,” the SBI chief said. Kumar, however, said that there was sufficient room to revive the private carrier. “

“We have not reached that point where we can say enough is enough and nothing else can be done… Every effort is being made by the lenders to keep the airline running. It is in everybody interest that Jet Airways continues flying,” he said. He clarified that the government has not given the lenders any directions and the decisions will be taken in commercial interest.

The Times of India reported

BS: Banks to take control of Jet Airways cockpit; lenders to infuse Rs 1,200 cr

21 March 2019: Lenders of Jet Airways are likely to take management control of the airline by superseding the current board, it is learnt.  A consortium of lenders, led by State Bank of India (SBI), would operate the airline managed by a professional board, a source in the know said. The move follows Etihad’s refusal to infuse additional funds in Jet under the current terms of the bank-led resolution plan. The lenders will sell their stake in Jet at an appropriate time.

According to the revised plan, promoter Naresh Goyal, his wife Anita Goyal and the directors nominated by the promoter would be asked to step down from the board, sources in the know said. The promoter-appointed directors include Nasim Zaidi and Gaurang Shetty, who’s also an executive at the airline.

The lenders, as part of the resolution process will infuse around Rs 1,200 crore into the airline as emergency funding. 
State-owned banks including State Bank of India and Punjab National Bank are the main lenders to Jet, which is now operating only one-third of its fleet of planes as the rest have been grounded due to non-payment to lessors.

“It’s unfortunate that both the owners have not been able to reach a consensus. But banks have decided that the company will not be allowed to fail and will take control of the airline,” said a senior banker leading the resolution process. A resolution is expected before the end of this month.

According to the plan, the airline will issue additional 114 million equity shares. After the restructuring, the lenders’ consortium led by the SBI, along with national sovereign fund National Infrastructure Investment Fund (NIIF) will hold around 51 per cent stake in the airline.

The lenders had to redraw the resolution plan after Etihad Airways CEO Tony Douglas refused to agree on the contours of the deal. Etihad, which holds 24 per cent in Jet, informed the lenders’ consortium that it would not participate in the rights issue or infuse fresh funds under the current terms and conditions of the resolution plan. However, bank executives maintained that talks are still on with Etihad as no ”conclusive” decision to exit has been taken by the Abu Dhabi-headquartered airline.

“There are multiple examples in the world where banks have taken over operations of the company and sold its stake to a suitor subsequently. We are definitely not going to run the company for a long time. This is a transitory holding,” a top banker said.

It’s important to have a resolution process by end of this month because if there’s no agreement by April 1 (180 days from January 1), Jet Airways will have to be declared a Non-Performing Account (NPA). 
On January 1, Jet Airways had informed the stock exchanges that it had defaulted on debt repayment to its consortium of lenders.

SBI chairman Rajnish Kumar, who met Union Finance Minister Arun Jaitley, along with senior officials including Nripendra Misra, principal secretary to the Prime Minister, on Wednesday, said taking Jet Airways to the insolvency court was not an option as it would lead to complete value erosion of the company.

“There are Rs 4000 crore worth of creditors, nobody wants to take Jet Airways through the insolvency process,” said Kumar.

The Insolvency and Bankruptcy Code (IBC), in case of service industry like an airline is the last option, according to Kumar. “Under IBC, the resolution of a service industry entity is nearly impossible and would mean we are grounding the airline. We will keep trying….  We have not reached a point where we can say enough is enough and nothing else can be done,” the SBI chairman said.

The Business Standard reported