IndusInd Bank's Insolvency Petition Not Maintainable, Says Zee

Zee Entertainment Enterprises Ltd. has contested the maintainability of the insolvency process initiated by IndusInd Bank Ltd. before the National Company Law Tribunal.

The company has claimed that the default in question occurred in October 2020, when the Insolvency Code was suspended, and so the bank's application should be dismissed.

In light of the Covid-19 pandemic, the government had suspended the period from Mar 25, 2020 to Mar 24, 2021 for the purpose of initiating corporate insolvency. Any default that occurred during such period cannot be the basis of initiating insolvency, the notification said.

IndusInd Bank had initiated insolvency proceedings against Zee in February last year for defaulting under a Debt Service Reserve Account Agreement between the bank and Siti Networks Ltd., to which Zee was also a party.

The company, under the agreement, had guaranteed a term loan of Rs 150 crore extended to Siti Networks by IndusInd. According to the terms of the agreement, Zee had provided a limited guarantee to maintain an amount equal to one quarter’s interest and one quarter’s principal at all times in the account for the purpose of servicing Siti’s debts.

According to IndusInd Bank, Siti has failed to maintain this amount since September 2019 and since then has been in continuing default. As a guarantor, Zee is liable for Siti’s debt and hence this petition, the bank told the court.

But, according to Zee, there's no default until the guarantee is explicitly invoked by the bank. The communications by IndusInd Bank in September 2019 and later in March 2020 merely inform the company about a shortage of Rs 69 lakh in the account and does not categorically invoke the guarantee.

Also, the communication in April 2020 suggests that the bank intends to invoke the guarantee, thereby confirming that the guarantee was not invoked until then, Zee's counsel Zal Andhyarujina told the NCLT.

A crystallised claim for repayment of debt amounting to Rs 83 crore was only made in October 2020, a period which is explicitly excluded under the Code for initiating insolvency process and should therefore be dismissed. Also, the default amount is Rs 69 lakh—an amount well below the minimum default required to initiate insolvency, Andhyarujina argued.

Zee is also in a legal tussle with IDBI Bank Ltd. under a similar agreement for the default of Rs 150 crore, for which corporate insolvency has been initiated before NCLT Mumbai.

IndusInd Bank's application will be next heard on Jan. 4.