Ericsson Contempt Case: Anil Ambani Pays The Price For RCom’s Delayed Bankruptcy Filing

A Supreme Court decision in the contempt case against Anil Ambani for non-payment of Rs 550 crore to operational creditor Ericsson is yet another signal to India’s businessmen that they need to take loan default and bankruptcy issues seriously. The law will no longer encourage wilful delays as a way of avoiding repayments or preventing bankruptcy proceedings.

Even though Ericsson is an operational creditor of Reliance Communications (RCom), and not entitled to priority in the settlement of dues compared to financial creditors, Ambani clearly angered the court by not complying with its order to pay Ericsson and delaying the inevitable on the plea that the amount will be paid when its deal to sell assets and spectrum to Reliance Jio materialises.

The deal fell through two months ago after the department of telecom refused to exempt Jio from paying RCom’s past spectrum dues. Anil Ambani then had no option but to file for bankruptcy – which he did earlier this month. But, in retrospect, one can say that the big mistake he made was to presume that a bankruptcy filing under the Insolvency and Bankruptcy Code (IBC) will protect him from an earlier Supreme Court order to repay Ericsson.

The court was not amused and deemed this to be a deliberate attempt to avoid compliance with its earlier order. The bench, with Justices R F Nariman and Vineet Saran on it, told Ambani today (20 February) to pay Ericsson Rs 453 crore in four weeks or face three months of jail. He was also fined, along with three of his companies, Rs 1 crore for contempt of court.

RCom deposited Rs 118 crore with the court in the form of a bank draft after the bench refused to accept Ambani’s offer to settle the contempt case with this part-payment last month.

Ambani missed two deadlines in September and December 2018 for repaying Ericsson, and contempt proceedings were initiated after that. Worse, some court officials were also found to be complicit in misinterpreting its earlier order asking Anil Ambani to be physically present in court earlier for the contempt proceedings.

The bench had not exempted Ambani from a personal appearance this January, but two court masters, ranked as assistant registrars, had put out a statement on the court’s website that personal appearance had been dispensed with. The two officials were dismissed by the Chief Justice for this misdemeanour.

The Anil Ambani-Ericsson case sets new precedents in IBC-related law.

First, court orders issued before a company files for bankruptcy cannot be bypassed merely by filing for bankruptcy later. Protection from creditors starts only after the bankruptcy filing. Anil Ambani made a huge mistake by delaying compliance with the earlier Supreme Court orders on Ericsson, and filing for bankruptcy too late to be protected from creditors.

Second, the courts, especially under a modern and sharp judge like Justice Nariman, are completely in tune with the spirit of the insolvency code, which is about speedy resolution of loan defaults. In earlier challenges to the IBC, and in the case of spoiler bids (by the Ruias against Arcelor for the purchase of Essar Steel), the court strongly batted against delays. The bench junked the Ruias’ bid to queer the pitch by offering a higher amount at the n’th hour when Arcelor Mittal had nearly won the bid. It also upheld the broad contours of the amended IBC that prevented defaulting promoters from bidding for their own companies. More recently, an attempt by operational creditors to delay the Essar Steel resolution was summarily rejected by the court.

Third, since financial creditors get first crack at the assets of insolvent firms, operational creditors do not stand much of a chance in loan recoveries unless they get in their blows first. This implies that threats to move insolvency courts will work better than actual recourse to insolvency. Ericsson has benefited this time largely because Ambani erred in delaying the bankruptcy filing. In future, promoters keen on protection from creditors have to act quicker in filing for bankruptcy, or find the resources to settle out of court.

The IBC is delivering in spades, thanks to the highest court’s willingness to act with speed in such cases. Justice Nariman will go down as the judge who helped put the fear of god in promoters seeking to delay payments in the hope of postponing the inevitable.