Why Did NCLT Dismiss IDBI Bank Insolvency Plea Against Zee?

Zee Entertainment Enterprises Ltd. said the National Company Law Tribunal (NCLT) dismissed its financial creditor IDBI Bank’s insolvency petition against the company.

The Mumbai bench of the NCLT dismissed the lender’s petition against the Indian media and entertainment company today, Zee said in a stock exchange announcement.

The order was passed by Judicial Member Kishore Vemulapalli and Technical Member Prabhat Kumar.

The development could clear the way for Zee’s merger deal with Sony’s India unit, as the company has already settled its disputes and claims with IndusInd Bank and Indian Performing Right Society Ltd. (IPRS).

BACKGROUND

IDBI Bank had filed a petition under Section 7 of the Insolvency and Bankruptcy Code (IBC) to initiate corporate insolvency resolution process (CIRP) against Zee, claiming a default of about 150 crore rupees ($18 million).

Zee earlier said IDBI Bank’s purported claim arises under a debt service reserve agreement signed by the bank and the company for the financial facility availed by Siti Networks Ltd., a part of the Essel Group.

The company disputed IDBI Bank’s claim in other proceedings filed by the bank against Zee for recovery of its “alleged” dues.

NCLT OBSERVATIONS

• Zee executed a guarantee agreement to secure the maintenance of two quarters interest on the working capital facility to the extent of 50 crore rupees agreed to be provided by IDBI Bank to Siti Networks.

• Siti Networks failed to maintain the debt service reserve account (DSRA) balance and consequently pay the interest accruing on the working capital facility since September 2019.

• IDBI Bank invoked the guarantee on 5 March 2021 asking Zee to immediately pay 61.97 crore rupees.

• The guarantee agreement makes Zee obliged until the repayment of complete facility and is irrevocable.

NCLT REMARKS

• The NCLT in its order said the bench has no doubt that obligation of Zee was limited to maintenance of two quarters interest on the working capital facility restricted up to 50 crore rupees. Zee is not obligated to pay amount of principal outstanding in the working capital facility, it added.

• “The clause of this guarantee agreement making the guarantee valid till the complete payment under the facility cannot enlarge the scope and make the corporate guarantor responsible for the outstanding on account of principal working capital facility,” the tribunal said in its order.

• The NCLT said IDBI Bank has made a claim of incorrect amount of 149.60 crore rupees in the petition, while the demand notice was issued only for a sum of 61.97 crore rupees.

• The interest of 10.68 crore rupees has accrued on the total outstanding of working capital Facility of 101.29 crore rupees, and Zee can, at best, be called upon to pay outstanding interest relatable to first 50 crore rupees of principal working capital facility, it noted.

FINAL WORDS

The NCLT said the bench is of the considered view that Zee committed the default in relation to its obligation to maintain two quarters interest in the principal borrower DSRA account during the period specified in Section 10A of the IBC.

The tribunal, however, noted the Section 10A of the IBC bars absolutely and forever, the filing of any application under Sections 7, 9 and 10 of the code, for defaults committed on or after 25 March 2020 up to 25 March 2021.

“In view of the forgoing discussion, this bench is of the considered view that the present application is barred by Section 10A of the code,” the NCLT said. “This application is also not maintainable on the ground that it is not in accordance with the intent and purport of the code.”

(Note: $1 = 82.6050 Indian rupees)

(Send feedback to editor@cornerofficejournal.com)