NCLT Mumbai Initiates Insolvency Proceedings Against Future Retail Ltd., Rejects Amazon's Intervention Plea

Background Facts

Future Retail Ltd. ("FRL/Corporate Debtor") is the flagship company of the Mr. Kishore Biyani led Future Group of companies that operates popular retail chains such as Big Bazaar, Foodhall, Easyday Club and WH Smith.

Bank of India ("Financial Creditor") had provided various credit facilities to the Corporate Debtor amounting to Rs. 1249.48 Crores and non-fund-based limits to the tune of Rs. 192.14 Crores, which were extended from time to time. These facilities were restructured under sanction Letter dated 17.04.2021 and Framework Agreement dated 26.04.2021.

When the Corporate Debtor defaulted in repayment, the account was required to be classified as NPA on 30.11.2020 as per RBI norms. However, due to stay on asset classification imposed by the Supreme Court vide an order dated 03.09.2020, the asset classification was maintained as standard, although the default persisted. Meanwhile on 27.09.2020, the Corporate Debtor had approached the Financial Creditor and certain other lenders for one-time restructuring of the financial facilities under the RBI Circular dated 06.08.2020, which permits one-time restructuring in respect of eligible borrowers facing stress on account of Covid-19. The Corporate Debtor, the Financial Creditor and other Lenders executed the Framework Agreement dated 26.04.2021 for restructuring the existing outstanding amounts. Under the Framework Agreement the Corporate Debtor was obligated to repay Rs. 788.40 Crores to the Financial Creditor and the other lenders by 31.03.2022.

The provisions of the Framework Agreement and RBI Circular read in conjunction imply that the Event of Default under the Framework Agreement requires an automatic and retrospective downgrade of the loan account to an NPA, at the end of the review period of 30 days, and upon occurrence of such an event of default under the Framework Agreement, the defaults existing prior to the Framework Agreement stand revived. In view of this, the classification of the facilities given to the Corporate Debtor has been downgraded to "NPA" in the books of the Financial Creditor on 31.01.2022.

Proceedings Before NCLT

In April 2022, the Financial Creditor had filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("IBC") before NCLT, Mumbai Bench, seeking initiation of Corporate Insolvency Resolution Process ("CIRP") against FRL over a default of Rs. 856.10 Crores.

The proceedings before NCLT had commenced in the backdrop of a failed deal with Reliance Group. In August 2020, FRL had become part of Rs. 24,713 Crores worth deal wherein Future Group had intended to sell nineteen of its companies operating in retail, wholesale, logistics and warehousing segments to Reliance Retail Ventures Ltd. ("RRVL"), a subsidiary of Reliance Industries Limited. All these companies were to consolidate into one entity named 'Future Enterprises Limited'. A Shareholder's meeting was convened by FRL from 20^th April to 23^rd April 2022 for seeking approval for the Reliance deal. While the shareholders and unsecured creditors voted in favour of the deal, the secured creditors voted against the deal. On 23.04.2022 Reliance Industries Ltd. and FRL had confirmed the cancellation of the deal.

Contentions Of The Corporate Debtor

The Corporate Debtor contended that the subject-matter of the Petition is pending adjudication before the Supreme Court in W.P. (C) No. 48 /2022, which was filed by the Corporate Debtor against the Lenders, including the Financial Creditor.

Contentions Of The Financial Creditor

Financial Creditor submitted that the Corporate Debtor has not been granted any interim reliefs in the said writ petition despite seeking such relief. Moreover, the payment obligation of the Corporate Debtor under the Framework Agreement is entirely independent of its obligation to monetize the small format stores, therefore, irrespective of its inability to monetize the small format stores, it is required to pay the Lenders. It was further argued that the existence of a dispute is not relevant for the purpose of admitting a petition under Section 7 of the IBC, if the existence of 'debt' and 'default' is admitted and established.

Decision Of The NCLT

The NCLT Bench held that the existence of debt and default had been proved and accordingly the Bench initiated CIRP against the Corporate Debtor and appointed Mr. Vijay Kumar V Iyer as the Interim Resolution Professional.

Further, while deciding Amazon's Intervention Petition in the matter, the Bench has held that Amazon is not even a stakeholder in respect of the Corporate Debtor and a complete third-party to the proceedings before the NCLT. Since Amazon has no locus standi to question initiation of proceedings under Section 7 of the IBC against the Corporate Debtor, the Intervention Petition was dismissed by the Bench.

Case title: Bank of India v Future Retail Ltd., CP (IB) No. 527/MB/2022.

Counsel For Financial Creditor: Senior Adv. Mr. Ravi Kadam a/w Mr. Pulkit Sharma Adv.

Counsel For the Corporate Debtor: Mr. Shyam Kapadia, Adv.

Counsel for Intervenor: Senior Adv. Rajiv Nayyar a/w Senior Adv. Majira Dasgupta, Zal Andhyarujina, Ms. Akanksha Agrawal and Jahaan Dastur, Advocates.

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