Reliance Naval Insolvency: What It Means For The Company And Its Lenders
Reliance Naval & Engineering Ltd. has been admitted for insolvency proceedings by the Ahmedabad bench of the National Company Law Tribunal, after legal proceedings that stretched out for over 18 months.
IDBI Bank Ltd. had first filed an insolvency petition against the Anil Ambani group company in June 2018 after it failed to repay dues to the lender. Earlier attempts by the company to come to a one-time settlement with its lenders had failed, with banks rejecting the proposal in May 2018.
According to disclosures made to the stock exchange, Reliance Naval has Rs 9,492 crore in loans outstanding. The company is now the second firm from the Anil Ambani Group to face insolvency after Reliance Communications Ltd.
The company informed exchanges about the admission of IDBI’s insolvency petition via a notification. A separate email sent by BloombergQuint on Monday morning did not elicit a response till the time of publishing.
What It Means For Lenders
For lenders, an admission into insolvency will mean a relatively lower provisioning hit.
According to the Reserve Bank of India’s June 7 guidelines for stressed asset resolution, if a resolution plan is not implemented in a stressed asset within 180 days of signing an inter-creditor agreement, lenders will have to make additional provisions of 20 percent. Banks can, however, write-back the additional provisions if a case is admitted for insolvency proceedings.
As such, the Jan.15 order by the Ahmedabad bench of the NCLT will mean that banks can escape additional provisions at least on this one account.
Rajeev Bal Sawangikar has been appointed as an interim resolution professional for the company. The committee of creditors will need to confirm Sawangikar’s appointment as the resolution professional, or suggest another person to take over the role.
The committee of creditors have 180 days to find a prospective bidder for the companies by first inviting expressions of interest. Ahead of that, promoters have the right to settle the debt and pull the company out of insolvency under Section 12A of the Insolvency and Bankruptcy Code.
Lenders will also need to take stock of the company’s additional funding needs during the period of insolvency.
According to a senior banker involved in the case, who spoke on the condition of anonymity, the committee of creditors will meet soon to take stock of the company’s current status. Once they have a clear understanding of the state of the completion of contracts, the lenders will have a clearer understanding of the funds required to execute existing projects. However, lenders will be wary of extending any large additional funding to the company, since it has been under stress for many years, the banker quoted above said.
What It Means For Defence Contracts?
The insolvency proceedings of Reliance Naval may have a bearing on the company’s ability to take and complete government defence contracts. Reliance Naval is the only private sector entity in the country to receive contracts to build warships from the Indian Navy.
Insolvency proceedings are accompanied by a moratorium but contracts may not be covered under this, said Suharsh Sinha, partner at law firm AZB & Parnters.
“The moratorium under the IBC covers any rights, licences or concessions granted by the government to the debtor. However, a contract is none of those things and may be terminated in accordance with its terms,” Sinha said. “Whether it is covered under the ‘essential goods and services’ category which gives the resolution professional powers to continue needs to be analysed. Typically a cancelled contract and dues pending under it are covered by the operational creditor framework," Sinha added.
According to the company’s 2018-19 annual report, it is currently engaged in construction of twenty ships for Indian Navy and Indian Coast Guard. The company is also certified by the US Navy for servicing of warships from the US Navy’s Seventh fleet. Currently, it is the only Indian Shipyard to achieve this landmark, the annual report stated.
While the moratorium under the insolvency proceedings may not specifically cover contracts, government departments have typically not resorted to cancelling existing orders, said Ajay Shaw, partner at DSK Legal.
“Typically, wherever government contracts are involved, the corresponding departments continue with them till the end of the project. This is because if they cancel a contract, it impacts the revival of the corporate debtor, which is the core of the IBC,” Shaw said. The matter, according to him, has been tested in court and the NCLT usually sides with continuing the contract. “The past payments made by the government department are classified under the operational creditor claims and any pending payments are classified as CIRP costs, which has a high ranking in the repayments proposed by a bidder,” shaw said.
Another lawyer, who spoke on condition of anonymity, said Reliance Naval would not be eligible for new defence contracts since these specify that the bidder must not be a defaulter. For existing contracts, the navy may take stock of the stage of completion and may chose to make some advance payments to ensure on-time delivery, this person said, adding that cancelling a contract can lead to further delays in delivery.
The Reliance Group took over Pipavav Defence And Offshore Engineering Ltd. in 2015, after the lenders initiated corporate debt restructuring proceedings against the company. The group renamed it Reliance Defence and Engineering Ltd. and later changed the name to Reliance Naval & Engineering.
For the financial year ended March 2019, the company reported a consolidated net loss of Rs 10,926 crore. Losses have persisted through FY20 as well, with the company reporting a net loss of Rs 375 crore in the quarter ended September 2019.