Supreme Court Seeks Banks' Response To Future Retail's Plea To Defer Coercive Steps Over Loan Default

The Supreme Court of India on Tuesday directed the consortium of 27 banks to file an affidavit in response to the writ petition filed by Future Retail Ltd (FRL) seeking the deferral of coercive actions over loan defaults.

A Bench comprising the Chief Justice of India NV Ramana, Justice AS Bopanna and Justice Hima Kohli also asked FRL to serve copy to the Reserve Bank of India and posted the matter day after tomorrow.

The writ petition under Article 32 has been filed by FRL seeking directions to set aside or alternatively withdraw the Event of Default Notices addressed by the lenders.

Senior Advocate Harish Salve, appearing for the FRL, opened the arguments by submitting, "RBI had come up with a scheme in August 2020 for those who got hit by COVID. Our retail business in the first lockdown went completely belly up".

Referring to the ongoing dispute with Amazon, Salve submitted that the FRL was faced with various injunctions orders and it could not materialize its assets for making payments to the consortium of banks as per the one-time settlement agreements.

"What the banks had suggested, one of the assets we have is the small-format stores. Banks said, at least sell the small-format stores. Because of the injunctions, we could not alienate the assets. So the banks expressed their displeasure. On December 31, 2021, we wrote a letter to the banks explaining all these. We told the Banks, why don't you take over the assets and sell it. Banks can invoke SARFAESI and they have a superior right. On 1st January 2022, the banks also obtained legal opinion to set up an Asset Sale Committee. On 5th January, we get "Event of Default Notices". The reason why we came here is, under the RBI guideline, the next step is the declaration of Non Performing Assets. Once it is declared NPA, the next step is Section 7 of the IBC. If this company goes into liquidation, everything will become infructuous", Salve continued.

Salve submitted that what the company needed was some time. If the deal with Reliance goes through, all debts could be cleared.  The merger with Reliance will require the sanction of NCLT. If things go uninterrupted, hopefully by August the merger scheme will be finalized, he added.

"The other company, Amazon, has offered you money?", CJI asked Salve.

"Amazon said they will ask Samara to buy all retail assets at 7,000 cr. 7000 crore is only what we owe. So it is like samara wants to have it cheap", Salve replied.

"How do you solve the problem I don't understand", CJI remarked.

"If the banks could give time till September, hopefully by then the deal will be complete and everyone can be paid off. If the Arbitrator holds that we can culminate the deal with Reliance, it is a relief", Salve said.

"Why don't you expedite the arbitration proceedings?", CJI asked. Salve replied that the hearing is starting tomorrow. He pointed out that if the company goes under liquidation, the banks will not get much after the "hair-cut".

Senior Advocate Mukul Rohatgi, appearing for the promoters of the company, submitted that coercive steps will follow them after the declaration of NPA, such as declaration as wilful defaulters, removal as directors, and possibly criminal proceedings under SFIO.

Writ not maintainable: Consortium of Banks

Senior Advocate Rakesh Dwivedi, appearing for the Consortium of Banks, submitted that the writ petition is not maintainable as there was no issue of violation of fundamental rights and the matter flowed from contractual relationships. He pointed out that many of the respondents are private banks and foreign banks against whom the fundamental rights are not enforceable.

"There should be no interim order. The default has already occurred one month ago", Dwivedi submitted.

He pointed out that the averment in the writ petition that FRL is not in a position to carry out its day to day affairs till March 2022. The writ petition itself is a testimony of the bankruptcy of FRL.

"We have nothing to do with Amazon or their arbitration. We are not parties to the arbitration", Dwivedi clarified.

"Mr.Dwivedi, if this is your stand, why don't you file the affidavit?", CJI asked.

"We can file the affidavit. But there should be no interim order", Dwivedi submitted.

"You have to take a realistic approach otherwise no party will get any benefit out of this. If writ can be maintainable or not is a different story", CJI remarked.

"I am representing all the 27 banks. We have to take a business call", Dwivedi replied.

Senior Advocate Gopal Subramaniam submitted during the hearing that Amazon was interested in the survival of FRL. "The scheme proposed by them is violative of the injunction order", Subramaniam added.

The bench directed the consortium of banks to file an affidavit and posted the matter day after tomorrow. 

Details of the petition

The plea has sought directions restraining the 27 respondent lenders from declaring FRL as a Non-Performing Asset and directing them to extend the timeline stipulated under the Framework Agreement for monetization of the Small Format Stores in line with the minutes of the meeting dated 01.01.2022.

Further directions have been sought to the lenders to extend the "cure period" / "review period" of 30 days under the Framework Agreement.

The plea has sought directions to the Reserve Bank of India to relax the "review period" (of 30days) contemplated under the August 6 Circular in the case of FRL

According to FRL, the injunction orders passed in arbitration and related proceedings initiated by Amazon to which it was erroneously joined as non-signatory party has impeded the FRL's ability to adhere to the timelines of monetisation of Small Format Stores under the Framework Agreement.

The petitioner has argued that despite having acknowledged the fact that the FRL's inability to monetize the Small Format Stores was on account of events outside the reasonable control of FRL and despite having accordingly waived their right to declare FRL's  inability to do so as an "Event of Default", lenders have issued Event of Default Notices to the FRL threatening initiation of proceedings under the Insolvency and Bankruptcy Code, 2016

According to FRL, these Event of Default Notices have been erroneously issued despite FRL having expressed and undeniably established its bona fide intent to adhere to the timelines prescribed in the Framework Agreement. Further, FRL had informed and explained the lenders of the orders of injunctions passed in arbitration and related proceedings initiated by Amazon

FRL has submitted that an agreement was arrived at between the parties on 01.01.2022, wherein the Respondent lenders agreed to set up an Asset Sale Committee to monetize the Small Format Stores of the FRL and recover dues under the Framework Agreement. Thus, besides having waived their right to declare the FRL's inability to monetize the Small Format Stores as an Event of Default, the lenders through the fresh agreement arrived at on 01.01.2022 as recorded in the Minutes of the Meeting dated 01.01.2022 extended the timeline for monetization of the Small Format Stores. However, contrary to the agreement, Event of Default Notices threaten the initiation of legal proceedings.

The petitioner has pointed out that the respondent lenders have also reserved their rights and remedies under the Framework Agreement and other Financing Documents, which includes remedies under the wider security available under the Financing Documents or even proceeding to declare the FRL's account as Non-Performing Asset.

FRL has submitted that it called upon the lenders to withdraw the Event of Default notices and requested them to adhere to the agreement of 01.01.2022, the they however erroneously, arbitrarily and without any reasoning failed to take any action.

According to FRL, not only are the acts of the Respondents unreasonable, arbitrary and without any justification or reasoning but they would also compromise FRL's very existence let alone severely hamper the it's right to carry on trade and business.

FRL has submitted that the following consequences could take place pursuant to the Event of Default Notices:

• FRL's account will be declared as a Non-Performing Asset.
• Pursuant to declaration as a Non-Performing Asset by any of the Respondent lenders, FRL's account would stand classified as a Non-Performing Asset by other lenders not even covered under the Framework Agreement
  
• Respondent Lenders would be free to initiate proceedings against FRL including insolvency proceedings under theInsolvency and Bankruptcy Code and to enforce the Security under the Framework Agreement thereby denuding the FRL of its asset base.
  
• The Respondent lenders could disclose / publish FRL and its Board of Directors as wilful defaults thereby reducing its credit rating and consequently compromising its ability to raise any further finance.
  

The Petitioner has submitted that the Petitioner's challenge to the orders of injunction operating against it which have restrained it from monetising the Small Format Stores by 31.12.2021 are pending before the Supreme Court. 

FRL has submitted that with the onset of the COVID - 19 pandemic its business,which largely depends on the ability of customers to visit its stores was adversely impacted. Consequently, it impacted FRL's ability to meet its bank obligations, leading to an accumulation of liabilities and a cash deficit of approximately Rs. 5,000 crore. Against this, the FRL had dues of approximately Rs. 4,275 crore falling due between March and September 2020.

According to FRL, given its deteriorating financial position, with no other alternative in hand, on 29.08.2020 the Board of Directors of the FRL approved a scheme of amalgamation of FRL and Reliance in the best interests of its employees (over 23,000 in number), lenders, vendors and its shareholders (approximately 4 lakh in number) and also to salvage the intrinsic value of the FRL

FRL has submitted that as an additional measure, on 27.09.2020, it filed respective applications with the lenders under the August 6 Circular, seeking restructuring of its Facilities in view of the impact of the COVID-19 pandemic on its financial position and cash flows.

FRL and the lenders executed the Framework Agreement on 26.04.2021 and the Existing Outstanding were restructured as set in terms of the Framework Agreement. Further, all the Facilities repayable to the lenders continued to be secured by the Security created under the "Financing Documents" 

According to FRL, it was required to monetize its Small Format Retail businesses by 31.12.2021 and the proceeds from monetization of the Small Format Retail Business of around INR 3,000 crore was to be utilised towards repayment of the re-structured facilities in accordance with the Framework Agreement.

However, Amazon invoked arbitration proceedings before the Singapore International Arbitration Centre and the Emergency Arbitrator passed an order interalia restricting FRL from selling its Retail Assets without the consent of Amazon.

This has been followed by series of litigation between Amazon and Future before the Supreme Court, Delhi High Court and Tribunal.

During hearing of the special leave petitions filed with regard to the Amazon-Future case, the Future Group had submitted before the Supreme Court that being in a financially precarious situation, Future Retail Ltd will "sink with 30,000 employees losing their jobs" if the Rs 26,000 crores deal with the Reliance doesn't go through.

Both FRL and Future Coupons Pvt Ltd argued that FRL should be allowed to go forward with the interlocutory proceedings of the scheme with Reliance to ensure that they would be able to finalise the deal once the dispute with Amazon is concluded.

It was argued that Amazon wants to paralyse everything, as they are not interested in FRL and they are targeting the Reliance group which is their real competitor.

Case Details: Future Retail Ltd vs Reserve Bank of India & Anr |W.P.(C) No. 48/2022

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