Explained: Why Future Group challenged insolvency proceedings in SC

Future Retail runs out of cash on Tuesday moved the Supreme Court to challenge possible insolvency proceedings over missing loan repayments, even as the company’s independent directors rejected a Rs 7,000 crore offer from Amazon-backed U.S. private equity firm Samara Capital. Amazon’s litigation has become the main obstacle to completing the sale of Future Group’s retail, wholesale and warehousing assets to Reliance Industries Ltd. (RIL), the US e-commerce giant claiming the proposed sale breaches an agreement it signed with Future Retail in 2019. The new developments in the case add to the web of legal challenges and twists and turns in the three-way struggle for control of mass distribution.

Why is Future Retail contesting possible insolvency proceedings?

Future Retail missed a payment of Rs 3,494.6 crore due to lenders on December 31 under a single resolution (OTR) plan to resolve debts to lenders. The company had requested a 30-day review period to make payment, but has now requested a relaxation of the review period and sought to prevent lenders from declaring the company and the asset non-performing, which could open it to insolvency proceedings.

Experts noted that Future Retail may be building on previous cases in which courts ruled that lenders should look at a company’s overall health and reputation and that large corporations in particular should not be coerced. to insolvency proceedings simply because they defaulted.

“There are cases where the courts have ruled that just because they defaulted doesn’t mean you can take a large, going concern into insolvency. You have to see balance sheets, financial performance, market position,” said Prashanth Shivadass, partner at law firm Shivadass & Shivadass.

Why has Future Retail failed to make payments to lenders in accordance with the OTR?

The company said in a regulatory filing that “due to ongoing litigation with Amazon.com NV Investment Holdings LLC, the company has been unable to complete the planned monetization of the specified business as planned in the OTR plan”.

The case had many twists and turns. Amazon, in 2019, signed an agreement whereby it acquired a 49% stake in Future Coupons Private Ltd. (FCPL). Next, Amazon-backed Samara Capital in June 2020 signed a non-binding term sheet to acquire Future Retail’s business for Rs 7,000 crore. Just two months later, in August 2020, Future Group announced a Rs 24,713 crore deal to sell the retail and wholesale business and logistics and warehousing arms to Reliance Venture Ltd, a subsidiary from Reliance Industries.

Amazon then moved the Singapore International Arbitration Center (SIAC) to oppose the proposed retail sale to RIL and won a stay, which was later upheld by the Supreme Court.

Amazon had cited covenants in the deal it signed when it acquired a 49% stake in Future Coupons in 2019, which gave it a call option on the acquisition of FCPL developer Future Retail. within 3 to 10 years. FCPL holds approximately 10% of the capital of Future Retail.

India’s Competition Commission, however, in December 2021 withdrew its approval of the original 2019 deal, saying Amazon had “deceived” the regulator into believing its focus was its interest in the FCPL’s activities and had “removed” this objective of establishing a strategic interest in Future Retail and having a “foot in the door” in the retail sector in India. The TCC order may void the agreement Amazon relied on to oppose Future Group’s plans to sell retail assets to RIL.

Amazon challenged the TCC order in the National Company Law Appellate Tribunal. Amazon also offered to help Future Retail raise funds to pay lenders through a Rs 7,000 crore deal from Samara Capital and asked the company to drop its proposed deal with Reliance.

Amazon had sent a proposal to the independent directors of Future Retail, who have since rejected the offer as an attempt to buy the company’s assets at a low price, noting that the offer would not be sufficient to cover the unpaid debts of FutureRetail.

Future Retail directors also raised concerns about how long it was likely to take to finalize any deal with Samara Capital, stressing that the company urgently needed funds to pay lenders.

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