Future Retail’s fate lies entangled in legal quagmire

Given the circumstances, the sooner the case is admitted to the National Company Law Tribunal, the better it is for Future and its lenders, legal experts said. Since the Insolvency and Bankruptcy Code (IBC) is a special legislation, it will take precedence over other ongoing litigation. They believe that this would lead to a more focused resolution approach than the multi-pronged legal battle over the assets of the Kishore Biyani-led retailer.

“If the application for corporate insolvency resolution is admitted by the National Company Law Tribunal (NCLT) against Future Retail, as per Section 14 of the IBC, a moratorium will be imposed," said Vedika Shah, an associate at Pioneer Legal.

As a result of the moratorium, new cases or continuation of pending litigation against Future Retail, including proceedings before the debt recovery tribunal (DRT), the Supreme Court and arbitration proceedings before the Singapore International Arbitration Centre, will be stayed, Shah said.

On 23 April, Reliance Industries said in a regulatory filing that its acquisition of Future Group’s retail, wholesale, logistics and warehousing businesses could not be implemented as lenders voted against the proposal.

Mint reported on Friday that lenders accounting for most of the loans to Future Group rejected the proposal after the Reliance Industries Ltd arm cut the deal value.

Experts said banks must have exercised their “commercial wisdom" while choosing between the estimated recoveries from the revised offer proposed by Reliance and taking the defaulting borrower to NCLT.

Bank of India, the leader of the consortium of lenders, referred Future Retail to the Mumbai bench of the NCLT on 14 April, although it is yet to be listed for admission.

It is still unclear whether Reliance would submit a resolution plan if and when the borrower gets admitted under the insolvency code. The odds are, however, stacked against Amazon at the insolvency tribunal. Two provisions—India’s restrictions on foreign investment in multi-brand retail and the bar on related parties under IBC—restrict it from bidding for the asset.

“Today, Amazon by itself cannot submit a resolution plan for Future Retail as a foreign entity is not allowed by India’s laws to be the sole owner of a multi-brand retail business. While foreign investors can be resolution applicants under IBC, it is the sectoral laws that set the investment ceilings," said Somdutta Bhattacharyya, a partner in the disputes resolution group of law firm Argus Partners.

Interestingly, Amazon might not be permitted to bid for Future Retail under IBC also because it is likely to be classified as a related party, owing to its stake in Future Coupons.

In August 2019, Amazon purchased a 49% stake in Future Coupons Ltd (which owns 7.3% equity in Future Retail through convertible warrants), with the right to buy into the flagship Future Retail after three to 10 years.

“In case corporate insolvency resolution process is initiated against Future Group entities, Amazon may not be eligible to submit a resolution plan in view of the bar provided under Section 29A of IBC, 2016," said Sandeep Bajaj, managing partner, PSL Advocates and Solicitors.

That apart, bankers are also miffed at how Reliance took over hundreds of prized Future Retail stores in February, and this could have played a part in them voting against the sale proposal.

On 15 March, lenders published an advertisement stating that anybody dealing in the company’s assets should keep in mind that these are subject at all times to the charge of the lenders. There could be some respite for lenders under IBC, though, experts said.

“A resolution professional can examine whether any asset has been transferred preferentially or fraudulently in the pre-insolvency resolution period. The resolution professional can move the NCLT to take back these stores if it is established that they have been preferentially or fraudulently transferred," Bhattacharyya added.