A man weighing piles of cash. (Photographer: Manaure Quintero/Bloomberg)

Era Infra’s Insolvency: Contractual Commitments Are Financial Debt, Says NCLT

A recent decision by the Delhi bench of the National Company Law Tribunal will bring significant comfort to lenders who have advanced loans based on contractual commitments that are not strictly seen as guarantees. The decision was made in the case of Era Infra Engineering Ltd. after the resolution professional dismissed several claims of ICICI Bank Ltd.

Claims Denied By Resolution Professional

The insolvency resolution process was initiated against Era Infra Engineering in May this year. ICICI Bank submitted its claims against the following group entities - Apex Buildsy, Hyderabad Ring Road Project, Dehradun Highways Project and Era Infrastructure India.

The resolution professional denied ICICI Bank’s Rs 700 crore in claims against Era Infrastructure India and Dehradun Highways Project, arising out of a put option, a non-disposal undertaking, a promoter’s undertaking, and a deed of pledge.

Put Option

ICICI Bank had sanctioned a rupee term loan (RTL) facility to Era Infrastructure India. As a guarantee against any default, under the 2011 loan purchase agreement, ICICI Bank had a put option. The agreement stated that in case of a default, ICICI Bank will have the right but not the obligation to sell the whole or part of the outstanding RTL facility to Era Infra Engineering.

Non-Disposal Agreement

Era Infra Engineering had also entered into a non-disposal arrangement with ICICI Bank in respect of its 30 percent stake in Era Infrastructure India. The agreement required Era Infra Engineering to not divest its 30 percent equity stake in Era Infrastructure India, and deposit these shares in a designated trust and retention account.

Both these claims were denied by the resolution professional on grounds that they can’t be construed as guarantee and so, don’t qualify as financial debt under the Insolvency and Bankruptcy Code, 2016.

Promoter’s Undertaking

ICICI Bank had also extended an rupee term loan facility and external commercial borrowing facility to Dehradun Highways Project, which had entered into a concession agreement with the National Highways Authority of India.

Era Infra Engineering had agreed to fund any payment shortfall to ICICI Bank in case the concession agreement was terminated. The resolution professional refused to admit this claim, saying Era Infra Engineering’s liability arose if there was a shortfall in payment to the lenders. This shortfall, the resolution professional argued, was difficult to ascertain since a settlement between NHAI and Dehradun Highways Project was in the works and there was a possibility of payment to ICICI Bank.

Pledge Deed

And finally, the pledge deed executed by Era Infra Engineering to secure the loan granted to Dehradun Highways Project cannot be admitted, the resolution professional stated, since ‘every form of security interest cannot fall within the expression ‘guarantee’.

NCLT Upholds All Claims

The NCLT pointed to the definition of ‘contract of guarantee’ under the Contract Act to say that a guarantee is an undertaking to indemnify if some other person doesn’t fulfil a promise. And since Era Infra Engineering stood guarantee for the facilities extended by ICICI Bank, the claims will qualify as financial debt under IBC. Default has occurred and the amount is recoverable from Era Infra Engineering, the tribunal order said.

The tribunal has proceeded on the fact that the ingredients of a guarantee are clearly being met- there is a borrower, a lender and surety, Ajay Shaw, an insolvency law partner at DSK Legal told BloombergQuint. The modus operandi, that is, the deed of undertaking, put option, pledge etc is only a methodology to agree to the guarantee, he added.

Deed of undertaking, assignment of loan etc. are usually contingent contracts, which are not worded so for books of accounts purposes. They are shown as contractual obligations and the balance sheet doesn’t reflect them as a contingent liability. But just because they are called so, doesn’t mean the nature of obligation changes.
Ajay Shaw, Partner, DSK Legal

The underlying purpose is to discharge the debt, Shaw added. Treating such agreements as financial debts will give lenders, who have claims arising from guarantees, voting rights akin to those creditors who have lent to the corporate debtor itself, he added.