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MUMBAI: Telecom equipment maker Ericsson petitioned the National Company Law Tribunal (NCLT) seeking the start of bankruptcyproceedings against Reliance Communications(RCom) and two of its subsidiaries over total unpaid dues of Rs 1,150 crore. The two subsidiaries are Reliance Infratel and Reliance Telecom.
If the petition is accepted by NCLT, it could disrupt the merger process between RCom and Aircel. Legal experts said it's unprecedented for a company to find itself in such a situation while a strategic debt restructuring package is being worked upon. Ericsson's petition was filed on September 11 and NCLT will hear arguments on the matter on September 26.
"Ericsson can confirm that the company has filed an insolvency petition against Reliance Communications in the NCLT in India," Ericsson said.
"Ericsson has done this as a last resort in order to resolve an issue regarding debt that Reliance owes to Ericsson for services provided under a contract, " the company said in a statement.
"For Ericsson, the amount is an acknowledged liability from RCom and therefore an undisputed amount," said Anil Kher, senior counsel for Ericsson. "If the petition is admitted after court hears both parties, then it can stall the merger process between Aircel and RCom." RCom lawyer Janak Dwarkadas said, "We are in talks to settle the matter out of court before September 26."
That, sources said, could involve pardoning of the interest amount of Rs 50 crore or payment of Rs 1,100 crore in instalments. A settlement could also mean others with dues may be tempted to go to court, said a senior lawyer.
"This is an upfront way for vendor companies to claim what is theirs if lenders don't include them in debt restructuring," he said. Last month, a court rejected Ericsson's right to object to admitting the merger application of Aircel and RCom as the amount owed to it was below 5% of RCom's total debt.
The application was simultaneously filed by 13 others apart from Ericsson, all seeking dues from RCom.
SDR Excercise
RCom is currently undergoing strategic debt restructuring under which banks have stopped collecting interest for 210 days that end in December. It must complete the merger of its wireless business with Aircel and the sale of its telecom towers to Brookfield before that. The merger hearing, which was also scheduled for Wednesday, was postponed to October 11.
"Legally it is very cut and dry that if money is owed, an application under insolvency can be filed, and all operational creditors with over Rs 1 lakh exposure can file," said Bahram Vakil, founding partner at AZB Partners, who has worked on the formulation of the new bankruptcy rule. He added that, ideally, multiple filings should expedite resolution of all cases, including the merger scheme.
RCom told the stock exchanges it intends to challenge the petitions. Its stock dropped 3.75% to Rs 21.80 on the BSE Wednesday. It told the bourses that the claim against RCom was for Rs 491.41 crore, while it was for Rs 534.75 crore against Reliance Infratel and Rs 129.34 against Reliance Telecom. Ericsson counsel told ET that RCom had on June 29 said it will pay Rs 125 crore by July 31 and subsequently Rs 60 crore a week. That didn't happen.
The company has been looking to merge with Aircel and sell its tower unit to Brookfield in a bid to pare debt of Rs 45,000 crore by 60%. The company, which has defaulted on some repayment obligations, needs to complete the merger as well as the tower sale within the seven month breather it has from lenders that expires in December.
Opposition to merger
Three of RCom's main lenders — China Development Bank, Standard Chartered Bank and HSBC — had objected to a petition seeking approval for the merger from being admitted in the NCLT. They eventually gave their consent but creditors in the form of Indus Towers, Ericsson, Department of Telecommunications (DoT), Bharti Infratel and GTL Infrastructure's Chennai Network Infrastructure objected, saying they had not been taken into confidence and their dues needed to be cleared.
NCLT allowed the merger case to be filed for final hearing last month. On Wednesday, the court was supposed to hear that case but RCom's counsel asked for four more weeks to discuss the matter with its three main lenders.
China Development Bank, Standard Chartered Bank and HSBC are yet to give their consent to the merger. The merger plan has already received approvals from Sebi, the Competition Commission of India and both the BSE and NSE.
A merger will prevent assets worth Rs 100,000 crore from being declared obsolete, and benefit 90 million consumers, 16,000 retail shareholders and 100,000 employees, the RCom counsel had said earlier, adding that if the merger is not approved by November, the loans would turn into non-performing assets and could lead to liquidation of the company.
RCom had earlier said it plans to complete both deals by September.
If the petition is accepted by NCLT, it could disrupt the merger process between RCom and Aircel. Legal experts said it's unprecedented for a company to find itself in such a situation while a strategic debt restructuring package is being worked upon. Ericsson's petition was filed on September 11 and NCLT will hear arguments on the matter on September 26.
"Ericsson can confirm that the company has filed an insolvency petition against Reliance Communications in the NCLT in India," Ericsson said.
"Ericsson has done this as a last resort in order to resolve an issue regarding debt that Reliance owes to Ericsson for services provided under a contract, " the company said in a statement.
"For Ericsson, the amount is an acknowledged liability from RCom and therefore an undisputed amount," said Anil Kher, senior counsel for Ericsson. "If the petition is admitted after court hears both parties, then it can stall the merger process between Aircel and RCom." RCom lawyer Janak Dwarkadas said, "We are in talks to settle the matter out of court before September 26."
That, sources said, could involve pardoning of the interest amount of Rs 50 crore or payment of Rs 1,100 crore in instalments. A settlement could also mean others with dues may be tempted to go to court, said a senior lawyer.
"This is an upfront way for vendor companies to claim what is theirs if lenders don't include them in debt restructuring," he said. Last month, a court rejected Ericsson's right to object to admitting the merger application of Aircel and RCom as the amount owed to it was below 5% of RCom's total debt.
The application was simultaneously filed by 13 others apart from Ericsson, all seeking dues from RCom.
SDR Excercise
RCom is currently undergoing strategic debt restructuring under which banks have stopped collecting interest for 210 days that end in December. It must complete the merger of its wireless business with Aircel and the sale of its telecom towers to Brookfield before that. The merger hearing, which was also scheduled for Wednesday, was postponed to October 11.
"Legally it is very cut and dry that if money is owed, an application under insolvency can be filed, and all operational creditors with over Rs 1 lakh exposure can file," said Bahram Vakil, founding partner at AZB Partners, who has worked on the formulation of the new bankruptcy rule. He added that, ideally, multiple filings should expedite resolution of all cases, including the merger scheme.
RCom told the stock exchanges it intends to challenge the petitions. Its stock dropped 3.75% to Rs 21.80 on the BSE Wednesday. It told the bourses that the claim against RCom was for Rs 491.41 crore, while it was for Rs 534.75 crore against Reliance Infratel and Rs 129.34 against Reliance Telecom. Ericsson counsel told ET that RCom had on June 29 said it will pay Rs 125 crore by July 31 and subsequently Rs 60 crore a week. That didn't happen.
The company has been looking to merge with Aircel and sell its tower unit to Brookfield in a bid to pare debt of Rs 45,000 crore by 60%. The company, which has defaulted on some repayment obligations, needs to complete the merger as well as the tower sale within the seven month breather it has from lenders that expires in December.
Opposition to merger
Three of RCom's main lenders — China Development Bank, Standard Chartered Bank and HSBC — had objected to a petition seeking approval for the merger from being admitted in the NCLT. They eventually gave their consent but creditors in the form of Indus Towers, Ericsson, Department of Telecommunications (DoT), Bharti Infratel and GTL Infrastructure's Chennai Network Infrastructure objected, saying they had not been taken into confidence and their dues needed to be cleared.
NCLT allowed the merger case to be filed for final hearing last month. On Wednesday, the court was supposed to hear that case but RCom's counsel asked for four more weeks to discuss the matter with its three main lenders.
China Development Bank, Standard Chartered Bank and HSBC are yet to give their consent to the merger. The merger plan has already received approvals from Sebi, the Competition Commission of India and both the BSE and NSE.
A merger will prevent assets worth Rs 100,000 crore from being declared obsolete, and benefit 90 million consumers, 16,000 retail shareholders and 100,000 employees, the RCom counsel had said earlier, adding that if the merger is not approved by November, the loans would turn into non-performing assets and could lead to liquidation of the company.
RCom had earlier said it plans to complete both deals by September.
