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NCLAT members give differing views in the Visa Infrastructure case

Radhika Merwin | Updated on October 15, 2019 Published on October 15, 2019

SBI’s application for initiation of insolvency proceedings in limbo

BL Research Bureau

While there are numerous issues cropping up under IBC---undue delay in resolution of large accounts being a key one-- there are other ambiguities and disputes that are turning out to be just as unsettling. In the Visa Infrastructure case, for instance, the State Bank of India’s application to initiate insolvency proceedings itself has been stuck for the past ten months. Recently, the appeal filed by SBI before the NCLAT, resulted in dissenting views by the two members of the bench, leading to the direction of constituting a third Judge, to decide on the matter.

Case background

SBI had filed an appeal with the NCLAT against an NCLT order (in January), rejecting its application for initiation of insolvency proceedings against Visa Infrastructure (corporate debtor). Visa Infrastructure (the promoter of Visa Steel) had stood as the corporate guarantor to Visa Steel.

SBI, along with other, lenders had granted various credit facilities to Visa Steel (borrower company). In 2012, Visa Steel was referred to the Corporate Debt Restructuring Forum (CDR) and lenders had restructured the financial facilities and guarantee according to the CDR package.

The CDR package provided that the promoters would infuse additional equity funds of ₹325 crore and such infusion of equity may be brought in the form of unsecured loan/ preference shares or by issuing fresh shares or by merging/ demerging some business divisions into separate companies/SPVs thorough scheme/slump sale and inviting strategic investor under the debt restructuring package.

Further, Visa Infrastructure--also the promoter of Visa Steel-- executed a corporate guarantee in favour of the lenders and created a negative lien on its property situated at Visa House, Alipor Road, Kolkata, to secure the restructured debt. The negative lien on Visa House was to be provided as security until the promoter brought in additional equity of ₹125 crore over and above ₹325 crore.

Admittedly, while promoters of Visa Steel had infused ₹325 crore in the form of equity as ‘slump sale’, according to SBI, the condition of bringing the additional equity of ₹125 crore was not fulfilled.

Creative book entry?

The dispute primarily relates to how infusion of equity has happened under the CDR package.

Visa Steel had merged its subsidiary Visa Bao with itself. According to Visa Infrastructure, this had taken care of the required infusion of ₹125 crore into Visa Steel, as upon the merger of assets and liabilities of Visa Bao, Visa Steel had accounted for the difference between the fair value of net assets of Visa Bao and face value of equity shares issued being ₹460 crore as capital reserve and reflected under the heading “other equities” thus meeting its obligation of bringing ₹125 crore.

While SBI stressed that the guarantee did not stand discharged as the additional equity to be infused had to be in the form of ‘cash infusion’, Justice Bansi Lal Bhat, member (,judicial) stated that the provision does not talk of infusion of ‘additional equity funds’ but only ‘additional equity’. He added that SBI had not been able to establish that additional equity of ₹125 crore was to be by way of cash infusion only. On the other hand, Visa Infrastructure was able to demonstrate that post-merger the capital reserves have increased by ₹460 crore, satisfying the condition of infusion of additional equity of ₹125 crore.

Hence since the corporate guarantor’s obligation stood discharged, there was no debt payable or question of default did not arise. Hence the NCLT’s decision to reject SBI’s insolvency application under Section 7 of the Code, was not erroneous.

However, Balvinder Singh, member (technical) disagreed with this decision. He noted that the stated mechanism (capital reserves increasing by ₹460 crore) had not been envisaged in any of the options listed in the guarantee/undertaking (of infusing fund). It seemed to be an attempt to creatively show through book entry that the obligation under the CDR had been met. He opined that Visa Infrastructure had not discharged the obligation as per the terms of the guarantee and that NCLT had committed an error in rejecting SBI’s insolvency application.

With the NCLAT members equally divided on the material issue of ‘debt’ and ‘default’, the direction has been issued to constitute an appropriate bench--third Judge---to decide on the case.

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Published on October 15, 2019
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