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RCom’s Insolvency: Will Ericsson’s Rs 550-Crore Victory Be Short-Lived?

The Reliance Communications Ltd. and Ericsson AB saga has gone through many twists and turns–an insolvency application followed by a conditional stay, settlement offer, desperate attempts to sell assets, reneging on the settlement agreement, contempt of court, potential jail term and payment.

It started in September 2017 when operational creditor Ericsson initiated insolvency proceedings against RComm for its unpaid dues. The application was admitted but RCom fought for a stay which was granted to it on the condition that it will pay Rs 550 crore to Ericsson as the settlement amount. RCom and its Chairman Anil Ambani agreed and gave an undertaking to the Supreme Court to pay the amount by Dec. 15, 2018. In the interim, the company tried to sell its spectrum assets to Reliance Jio Infocomm Ltd. but failed to get the telecom department’s nod.

The clock on the settlement agreement kept ticking, the company missed two court-granted deadlines which prompted Ericsson to file contempt petitions against RCom and Anil Ambani. Finally, in February this year, the Supreme Court found them guilty of contempt, granting RCom and Anil Ambani four weeks to pay Ericsson, failing which three months imprisonment was directed. Just as the four-week deadline was about to expire, RCom paid Ericsson.

In playwright’s parlance, this was Act I. Act II is getting started and three issues will likely determine the plot:

  • Ericsson needs the Supreme Court’s approval to withdraw its original insolvency application. It has gone to the apex court to do so but RCom is arguing against it.
  • If the Supreme Court allows insolvency proceedings to continue, Ericsson may have to return Rs 550 crore to RCom because the payment may qualify as a preferential transaction.
  • The date of commencement of insolvency against RCom will determine if the Rs 550 crore payment can be covered under Insolvency and Bankruptcy Code’s preferential transaction provisions.

The Merchant Of Sweden & Its Insolvency Application

The Swedish telecom equipment maker’s insolvency application against RCom was admitted by NCLT in Mumbai on May 15, 2018, due to unpaid dues worth over Rs 1,000 crore. Since it has now been paid Rs 550 crore—as the settlement amount—Ericsson is seeking to withdraw its insolvency application before the Supreme Court and RCom is opposing it.

If the apex court disallows Ericsson’s plea, the insolvency proceedings against RCom will resume. Here, an observation in NCLAT’s order in May last year will assume importance. The appellate tribunal had noted that Ericsson may have to return the money to the company if RCom goes into insolvency.

If the apex court allows Ericsson to withdraw its insolvency application, Ericsson may get to keep the Rs 550 crore but not for long. The IBC bars fresh insolvency proceedings against a corporate debtor for one year if it has gone through the resolution process, Pooja Mahajan, managing partner at Chandhiok & Mahajan, said. Since Ericsson’s application ended in a settlement, any other creditor may not be barred from initiating fresh insolvency action; and if that happens, this payment will be covered under IBC’s preferential transaction provisions, she said.

Midsummer Nightmare?

The IBC requires a resolution professional to assess whether the corporate debtor had entered into a preferential transaction in the last one year from the date of commencement of the insolvency process.

A preferential transaction is defined to mean as a transaction where property of the corporate debtor is transferred to a creditor over debt and such a transfer places this creditor in a position which is beneficial compared to where it would’ve been in the hierarchy laid down under IBC. Simply put, in this case, RCom made a payment to Ericsson which placed the latter in a beneficial position compared to the financial creditors.

Interestingly, payments made as a result of court orders—as is the case here—can also come under the ambit of preferential transaction.

To determine if a particular payment is preferential or not, the resolution professional—once he’s satisfied—has to make an application before the NCLT, which makes a decision.

The IBC doesn’t go into the question whether a corporate debtor had any intention to prefer one creditor over the others, Mahajan pointed out.

“If you look at the jurisprudence under company law or international case laws, payments made as a result of court orders, or as a result of a threat, or to avoid litigation or liquidation are generally not considered as preferential transactions.”

The IBC language isn’t clear—it says just because a payment is made pursuant to a court order doesn’t mean it’s out of the preferential-transaction ambit, she said.

Ericsson basically used IBC as a tool for debt recovery — the payment was made for its benefit and it got paid far ahead of RCom’s financial creditors; so this payment will qualify as a preferential transaction, Sudipta Routh, partner at IndusLaw, said.

“This will trigger a clawback—that’s quite a big risk that Ericsson is now facing.”

Comedy Of Errors

The final twist that will determine Ericsson’s tale is what’s allowed to be the date of commencement of RCom’s insolvency proceedings.

Under IBC, if a payment is made to a non-related party, the resolution professional can go back up to one year to determine if it was a preferential transaction.

If the date of commencement is taken to be May 15, 2018—when NCLT Mumbai admitted the insolvency petition—the Rs 550 crore payment to Ericsson, which happened in March this year, will not get covered under the preferential transaction provision, Mahajan said.

But if Ericsson is allowed to withdraw its application, and fresh insolvency action is initiated against RCom, then this payment can be looked into, she added.

“If that happens, the source of payment to Ericsson will assume importance. It’s not clear where did this Rs 550 crore come from. Part of the money may have come from RCom and part of it from Anil Ambani. So, provisions on preferential transaction will only get attracted to the amount paid by RCom. ”

Routh had a different view. He said that a payment can be tested for its preferential nature even during the insolvency process.

“Preferential transactions can occur during the insolvency process as well. We’ve seen cases where assets were sold, money was taken from the company during the resolution process. So, all of this can be clawed back. ”

Mahajan agreed that if courts deem May 15, 2018, as the commencement date, then a payment of this nature will be seen as a violation of the moratorium provisions and Ericsson can be asked to return it. But the problem here is, she explained, that the moratorium provisions were in limbo when the NCLAT granted a stay on the insolvency.

“Ericsson is then likely to argue that where is the question of breach of moratorium when NCLAT had stayed the insolvency process. And here’s where the situation gets complicated—the payment can’t be looked at if May 2018 is taken as commencement of IBC process. And RCom won’t even get the protection of the moratorium provisions because there was a stay on it when the payment was made. ”

All this can change if the Supreme Court decides a date after March 19—when the payment to Ericsson was made—as the insolvency commencement date, she said.―Bloomberg Quint

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