Home / Companies / Start-ups /  HC’s Oyo order may impact defaulting startups

BENGALURU : Bengaluru: Delhi High Court's recent order which directs Oyo Hotels and Homes to register details of all debt-free assets in order to pay off creditors will set a significant precedent for startups who default in meeting minimum business guarantee payments to vendors, lawyers and policy experts said.

The high court was hearing a plea by hospitality firm Anam Datsec Pvt Ltd which sought damages worth 8 crore from Oyo for alleged non-payment of dues.

On 7 July, the court had initially passed an order directing Oyo Hotels to file a “sworn affidavit" detailing a list of all unencumbered assets—hotels and properties free of debt and other liabilities—on the plea by Anam Dastec. Oyo was given two weeks to submit the affidavit.

However, hotel operator Anam Dastec later filed a contempt of court petition against Oyo chief executive Ritesh Agarwal alleging that the hotel aggregator failed to comply with the 7 July order. Advocate Sameer Rohtagi appearing for Anam Dastec filed the contempt petition on 10 August, and the matter was again heard by the court on 20th August.

Rohtagi and a spokesperson for Anam Dastec declined to comment.

Acting on a contempt of court petition, Delhi HC has now given Oyo a deadline of 5 October, the next date of hearing, to submit the sworn affidavit listing debt-free property details.

The HC has also directed Oyo to submit information such as a list of hotels, shareholding status, and valuations of properties in a ‘sealed envelope’ so that the information doesn’t get publicly recorded during the proceedings.

The order is expected to have a deeper precedent for consumer Internet startups that operate on a minimum business guarantee model (MBG). Mint reported recently that startups in hospitality, co-living and urban mobility have been struggling to keep up with MBG payments to their vendors and suppliers.

Hotel aggregator Oyo and co-living platform NestAway have relied on MBG contracts to attract property owners in the past. Owners who leased their properties to them received a fixed minimum amount every month. Both Oyo and NestAway would take over the leased property, renovate and rent it out to customers.

In recent months, Oyo suspended contracts with over 250 hotel owners for its “Townhouse" properties across India and stopped making minimum payments to hotel partners. The startup invoked force majeure and served notices to property owners citing a negative impact on business.

Co-living startup Nestaway, vehicle rental startups including Drivezy and Zoomcar is also facing similar allegations on non-payment of dues to vendors. And vendors may explore a similar option in a civil court if they choose to take up the matter legally, tech policy experts and investment bankers said.

"Amassing voluminous litigation arising out of violations of contractual obligations, in a determined manner on a pan India level, belies malfunctioning and mismanagement at the highest level. The order of disclosure of assets in such circumstances sets a precedential tone in public interest to ascertain accountability of mighty corporates against the defenseless generalia," said a lawyer, who looks at arbitration and corporate law asking to remain anonymous.

Another lawyer who looks at property disputes said that it is important for the petitioner (Anam Daste) to have knowledge of assets to make sure that they (assets) are free from any loan or any mortgage.

“Justice Kathawalla had this regular practice to ask developers to provide the list of their assets (in property dispute cases). This helps honest litigants secure their monies," the lawyer said.

Lawyers and investment bankers agree that many startups in the past have inflated their balance sheets to build high valuations. And when vendors take large startups to court, they will face a complex position since giving out shareholding and property details may hurt the company itself in the long-run.

“Courts and petitioners in such cases have an equal obligation not to make the information public, as that will hurt the startup…Shares will tremble, and the company may lose its face in the market," added the second property lawyer.

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