Author DefaultReliance Capital under CIRP: Is Workers’ PF Money at Risk?
– By Mr. Chidambaram Ramesh [Author of The Law of Employees’ Provident Funds – A Case-law Perspective]
In response to a recent Rajya Shaba question,[1] the Finance Ministry stated that EPFO invested Rs. 2,500 crores in Reliance Capital Ltd. (RCL), which has defaulted on interest payments since October 2019, and that the total default interest on non-convertible debentures (NCDs)(Secured) is Rs. 534.64 crore. There has been no action taken by the Labour Ministry in response to a request from the EPFO for it to commence the CIRP against the RCL, claiming that since the maturity date of investment in RCL has not yet passed, there is no default on the “principal amount” as of date. The matter has been brought to the attention of the media, which has issued a warning that the EPFO’s hard-earned money invested in Reliance Capital Limited is at jeopardy. Let’s discuss the issues and the remedial measures.
CIRP For Financial Service Providers
Section 3(17) of the Insolvency and Bankruptcy Code, 2016 (the Code) defines a “financial service provider” as a person engaged in the business of providing financial services in terms of an authorisation issued or registration granted by a financial sector regulator. In light of the above definition, Reliance Capital Limited falls within the meaning of “Financial Service Provider” (FSP). Pertinently, the Code does not detail the procedure for the Corporation Insolvency Resolution Process concerning the Financial Service Provides. For instance, Section 3(7) excludes the financial service provider from the meaning of “Corporate Person.” At the same time, in Section 227 of the Code, a provision was made for conducting insolvency and liquidation proceedings in the category of financial service providers, in consultation with the appropriate financial sector regulators. Invoking this power, the Central Government has notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 on 15th November, 2019.
Status of the Workers’ Money
In the Reliance Capital case, based on the intimation received from the YES Bank limited, the Reserve Bank of India, being the appropriate regulator, has filed an application in the NCLT, Mumbai Bench under section 227 read with section 239(2)(zk) of the Code read with Rule 5 and 6 of the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudication Authority) Rules, 2019.[2] Besides this, the RBI, in the exercise of its powers under Section 45-IE of the Reserve Bank of India, Act, 1934, has superseded the Board of Directors of Reliance Capital Ltd. and appointed Mr Nageswara Rao Y., (the former Executive Director of the Bank of Maharashtra) as the Administrator. He is supposed to exercise the powers and functions of the insolvency professional, interim resolution professional, resolution professional, or the liquidator for the purpose of insolvency and liquidation proceedings of a financial service provider. The Administrator made a public announcement on 7th December 2021 calling for claims from the financial and other creditors. As per the information available on the website https://www.reliancecapital.co.in/List-of-Creditors.aspx, the Central Board of Trustees, EPF has filed claims for a sum of Rs. 3338.75 crores against which the Administrator has initially admitted a sum of Rs. 3308.67 crores, leaving a balance of Rs. 30.08 crores for verification. Besides the Central Board of Trustees, EPF, which is a statutory body, as many as 600 private Provident Fund trusts have also invested their money in Reliance Capital Limited, as could be understood from the list of creditors.
Financial Debt and the Concept of ‘Commercial Insolvency’
In Reliance Infocomm Limited v Sheetal Refineries Pvt. Ltd.,[3] the Andhra Pradesh High Court held that the words “unable to pay its dues” in Sec. 433(e) of the Companies Act should be taken in the commercial sense – that is, to make the Court feel satisfied that the existing and provable assets would be insufficient to meet the existing liabilities. In other words, the Company has no wherewithal to meet its commercial liabilities. The argument here is whether the inability to pay the interest alone is sufficient to commence the CIRP, or if the financial creditor should wait until the investment matures to determine the corporate debtor’s bankruptcy, as claimed by the Finance Ministry.
The word ‘debt’ is defined in Section 3(11) of the Code as a responsibility or obligation in respect of a claim due from any person and includes both financial debt and operational debt. Again, Section 5(8) of the Code defines ‘financial debt’ as a debt along with interest, if any, which is disbursed against the consideration for the time value of money, which inter alia, includes money borrowed against payment of interest, etc. The concept of ‘time value of money’ is of importance here. It implies that money today is worth more than money in the future. As a result, borrowers charge interest to protect their money from inflation and to compensate them for incurring the risk of lending it out.
The phrase “disbursed against the consideration for the time value of money” has been the subject of interpretation only in a handful of cases under the Code. The words “time value” have been interpreted to mean compensation or the price paid for the length of time for which the money has been disbursed. This may be in the form of interest paid on the money or the factoring of a discount in the payment.[4] In Pioneer Urban Land and Infrastructure Limited and another vs Union of India and others [2019] ibclaw.in 13 SC, the Supreme Court held that even individuals who were debenture holders and fixed deposit holders could be financial creditors who could initiate the Corporate Resolution Process. In M/s Orator Marketing Pvt. Ltd. vs M/s Samtex Desinz Pvt. Ltd.,[5] the Supreme Court observed that the definition of ‘financial debt’ in Section 5(8) of the Code cannot be read in isolation, without considering some other relevant definitions, particularly, the definition of ‘claim’ in Section 3(6), ‘corporate debtor’ in Section 3(8), ‘creditor’ in Section 3(10), ‘debt’ in Section 3(11), ‘default’ in Section 3(12), ‘financial creditor’ in Section 5(7) as well as the provisions, inter alia, of Sections 6 and Section 7 of the Code. There are other instances also where the NCLTs allowed the initiation of CIRP for non-payment of the interest. For instance, the NCLT, Kolkata admitted the insolvency petition filed by Gulf Oil Lubricants India Limited (GOLIL), against Eastern Coalfields Ltd. (ECL), a subsidiary of Coal India, on its refusal to pay the interest amount at the rate of 18 per cent per annum on the original debt of around Rs. 85 lakh. Thus, the word ‘financial debt’ includes not only the principal amount but also the interest due thereon.
The IL & FS Experience
When Provident Fund trusts engaged in the debt-ridden Infrastructure Leasing and Financial Services Ltd. (IL & FS) were frightened of significant losses a few years ago, the finance ministry declared that such superannuated bonds are not covered by the government and are subject to market risks. At the time, the EPFO held securities in IL & FS worth Rs. 574.73 crore that had defaulted on principal and interest payments. Fortunately, the Supreme Court intervened and demanded that the EPFO’s entire debt be liquidated on a priority basis. The Central Board of Trustees, EPF, as the custodian of the workers’ money, is thus required to act expeditiously in realizing the whole sum with interest in order to protect the poor workers’ social security benefits, without waiting for advice from other ministries.
Reference:
[1] Unstarred Question No.1795 answered on 14-12-2021.
[3] 2008 142 CompCas 170 AP
[4] Pioneer Urban Land and Infrastructure Limited and another vs Union of India and others [2019] ibclaw.in 13 SC
[5] (2021) ibclaw.in 68 SC, decided on 26th July 2021.
