Third judge to decide on bank’s pleato initiate insolvency proceedingsagainst the corporate debtor
While there are numerous issues cropping up under IBC — undue delays in the resolution of large accounts being a key one — there are other ambiguities and disputes that are just as unsettling.
In the Visa Infrastructure case, for instance, SBI’s application to initiate insolvency proceedings itself has been stuck for the past 10 months. Recently, the appeal filed by the bank before the National Company Law Appellate Tribunal (NCLAT) elicited opposite views from the two members of the Bench, leading to the direction of consulting a third judge to decide on the matter.
Case background
SBI had filed an appeal with the NCLAT against an NCLT (National Company Law Tribunal) order in January rejecting its application for initiating insolvency proceedings against Visa Infrastructure, the corporate debtor. Visa Infra (the promoter of Visa Steel) had stood as the corporate guarantor to Visa Steel.
SBI, along with other lenders, had granted various credit facilities to Visa Steel. In 2012, Visa Steel was referred to the Corporate Debt Restructuring (CDR) Forum and lenders had restructured the financial facilities and guarantee according to the CDR package.
The CDR package provided that the promoters would infuse additional equity funds of Rs. 325 crore, which may be brought in in the form of unsecured loan/preference shares, by issuing fresh shares, by merging/demerging some business divisions into separate companies/SPVs thorough a scheme/slump sale, or by inviting a strategic investor under the debt restructuring package.
Further, Visa Infra executed a corporate guarantee in favour of the lenders and created a negative lien on its property ‘Visa House’, located on Alipor Road, Kolkata, to secure the restructured debt. The negative lien was to be provided as security until the promoter brought in additional equity of Rs. 125 crore over and above Rs. 325 crore.
While the promoters of Visa Steel had infused Rs. 325 crore in the form of equity as a ‘slump sale’, according to SBI, the condition of bringing the additional equity of Rs. 125 crore was not fulfilled.
Creative book entry?
The dispute primarily relates to how the infusion of equity happened under the CDR package. Visa Steel had merged its subsidiary Visa Bao with itself. According to Visa Infra, this had taken care of the required infusion of Rs. 125 crore into Visa Steel, as upon the merger of assets and liabilities of Visa Bao, Visa Steel had accounted for the difference between the fair value of net assets of Visa Bao and face value of equity shares issued, being Rs. 460 crore, as capital reserve and reflected under the heading “other equities”, thus meeting its obligation of bringing in Rs. 125 crore.
While SBI stressed that the guarantee did not stand discharged as the additional equity to be infused had to be in the form of ‘cash infusion’, Justice Bansi Lal Bhat, Member (Judicial), stated that the provision does not talk of infusion of ‘additional equity funds’ but only ‘additional equity’. He added that SBI had not been able to establish that additional equity of Rs. 125 crore was to be by way of cash infusion only. On the other hand, Visa Infrastructure was able to demonstrate that, post-merger, the capital reserves increased by Rs. 460 crore, satisfying the condition of infusion of additional equity of Rs. 125 crore.
Question of default
Hence, since the corporate guarantor’s obligation stood discharged, there was no debt payable or the question of default did not arise. Hence the NCLT’s decision to reject SBI’s insolvency application under Section 7 of the IBC was not erroneous, said Bhat.
However, Balvinder Singh, Member (Technical), disagreed. He noted that the stated mechanism (capital reserves increasing by Rs. 460 crore) had not been envisaged in any of the options listed in the guarantee/undertaking (of infusing fund). It seemed to be an attempt to creatively show through book entry that the obligation under the CDR had been met. He opined that Visa Infra had not discharged the obligation per the terms of the guarantee and that the NCLT had committed an error in rejecting SBI’s insolvency application.
With the NCLAT members equally divided on the material issue of ‘debt’ and ‘default’, a direction has been issued to constitute an appropriate bench — a third judge — to decide on the case.
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