India. Mumbai, Maharashtra. The National Company Law Tribunal (NCLT)’s Mumbai bench has allowed State Bank of India (SBI) to initiate insolvency proceedings against Anil Dhirajlal Ambani, Chairman of the Reliance ADA Group. Two companies promoted by Anil Ambani failed to repay loan worth Rs 1,200 crore. Resolution Professional has been appointed to initiate the insolvency resolution process.
Jitender Kothari has been appointed as the Resolution Professional, to handle the proceedings against Ambani. Ambani is the personal guarantor for the loan obtained by him for his companies- Reliance Communications Limited (RCOM) and Reliance Infratel Limited (RITL). The proceedings will be carried out under section 60(2) of the Insolvency and Bankruptcy Code (IBC), 2016. This order was passed by a two-member bench comprising-Member (Judicial) Janab Mohammed Ajmal and Member (Technical) Ravikumar Duraisamy of NCLT, on August 20, 2020.
Ambani is the personal guarantor
Ambani is the personal guarantor, to loans worth Rs 565 crore and Rs 635 crore obtained in 2016 from SBI for RCOM and RITL respective. The accounts were declared as Non-Performing Accounts (NPA) with effect from August 26, 2016, by the SBI, when these companies failed to repay the debt.
SBI invokes personal guarantee
Apprehending that it may not be able to recover the claim amount from the ongoing Corporate Insolvency Resolution Process (CIRP), the SBI invoked the personal guarantee agreement in January 2018. Given the fact that the “Industrial and Commercial Bank of China Limited”, “China Development Bank” and “Exim Bank of China” have already initiated recovery proceedings against Ambani in the United Kingdom. The SBI feared that the attempts to initiate enforcement or execution proceedings in India, including attachment or restraint of his assets in India and abroad, may not yield any result.
Chinese banks approched UK court
It may be recalled that Ambani had also offered a personal guarantee on the Chinese banks’ loans to RCOM in 2012. When the Chinese banks approached the London Court, Judge Nigel Teare on May 22, had ruled in favour of above three state-controlled Chinese banks including Industrial & Commercial Bank of China Ltd, and had ordered Ambani to pay $700 million.
Hypothecation of various assets
Before NCLT, it was argued on behalf of Ambani that the credit facilities were secured by first ranking and second-ranking charge by hypothecation over various assets of RCOM, RITL, Reliance Communications Infrastructure Limited (RCIL”) and Reliance Telecom Limited and pledge over the shareholding of Reliance Webstore Limited and Reliance IDC Limited. Besides, the corporate guarantee of RCIL, RCOM and Reliance Telecom Limited were given in respect of the RCOM facility, and the corporate guarantee of RCIL, RCOM, and Reliance Telecom Limited was given in respect of the RITL.
Also, the “Axis Trustee Services Limited” was appointed as the security trustee for both the credit facilities. It was the understanding between the financial creditor and personal guarantor, at the time of execution of the personal guarantee deed on September 23, 2016, that the corporate guarantee provided by RITL, Reliance Communications Infrastructure Limited, RCOM and Reliance Telecom Limited would be invoked before invoking the personal guarantee. Similarly, the personal guarantee would be invoked only if there is any shortfall in recovering the amount under credit facilities.
RCOM and RITL were forced by commercial and market conditions particularly due to continuous market disruptions in the telecom industry in 2017 to default in repayments of the credit facilities. Besides, the “UV Asset Reconstruction Company Limited” has already submitted the resolution plan for RCOM and RITL, the lawyers for Ambani submitted.
Given the submissions, the NCLT decided not to proceed against his companies at this point. There is no urgency in the present case since the personal guarantee would stand discharged after the plans are accepted and implemented, NCLT opined. The NCLT perused the provisions of the IBC and observed that it was “fallacious” to assume that no action could be taken against Ambani. It stated that even while an application for CIRP or liquidation proceedings of corporate debtors is pending, an application against the personal guarantor is also allowed to be filed.
NCLT sets precedent
NCLT’s ruling is the most high-profile insolvency case against a founder who pledged to pay loans on behalf of their companies, which have since been dragged into bankruptcy and can set precedent for future lawsuits. Still, the legal case puts a moratorium on attempts to recover dues from Ambani and may hurt a group of Chinese banks’ ability to enforce a separate London court’s order asking Ambani to pay $700 million.
Ambani to appeal before NCLT?
Reacting to NCLT directions, a spokesman for Ambani stated: Ambani is reviewing the order dated 20 August 2020 of the NCLT, Mumbai branch, and is taking advice on filing an appropriate appeal before the National Company Law Appellate Tribunal against the appointment of the Resolution Professional. The NCLT has declined SBI’s request for a restriction on Ambani from dealing or appropriating his assets, to the prejudice of the interest of SBI.