EXCLUSIVE: NCLT disqualifies Citi Securities as financial creditor of Reliance Naval

A key legal hurdle in the efforts by Indian public-sector banks to recover dues from Anil Ambani’s debt-laden Reliance Naval and Engineering Ltd has been removed with Citi Securities & Financial Services Pvt Ltd losing its plea before the National Company Law Tribunal (NCLT), Ahmedabad.
 
Mumbai-registered Citi Securities (not related to the American multinational investment bank and financial services corporation Citigroup) had moved the NCLT seeking to be recognised as a financial creditor with a claim of Rs 2,538 crore of assigned debt due from Reliance Naval. The company also sought to be counted as a voting member of the Committee of Creditors (CoC) overseeing the bankruptcy and insolvency process of the debt-laden firm.
 
The NCLT has, in an order last week, said the “assignment of debt was not in good faith as portrayed and rather shows that the arrangement was made with a view to get backdoor entry into the CoC through the applicant” and “to have control over the resolution process as Reliance Infrastructure Ltd (another Anil Ambani group company) is a related party of Reliance Naval and cannot be a member of the CoC”.
 
The NCLT further held that the act of assignment of debt with a “malafide intention cannot give an equivalent right with that of the unrelated financial creditors”.
 
Accordingly, the NCLT disqualified Citi Securities as a financial creditor under Section 21(2) of Insolvency and Bankruptcy Code, and did not permit it to enter the CoC as a member.
 
The Reliance Naval insolvency saga started in September 2018 after IDBI Bank filed an insolvency application against the company to recover close to Rs 12,429 crore in outstanding debt. Among the other top 10 financial creditors to the firm are State Bank of India, with an exposure of Rs 1,965 crore and Union Bank of India with around Rs 1,555 crore of outstanding loans.

Resolution proceedings of Reliance Naval began in January 2020 and saw the lenders accept a bid two years later last December. The winning consortium is led by Mumbai-based industrialist Nikhil V. Merchant with an offer of Rs 2,700 crore.
 
Sources in the know of the legal tangle said that while the NCLT has disqualified Citi Securities as a financial creditor, the successful completion of the insolvency process of Reliance Naval could take some more time.
 
This is because the erstwhile promoters of the shipyard, Nikhil Gandhi and Bhavesh Gandhi, who are guarantors of the bank loans to Reliance Naval, have also filed similar applications before the NCLT to gain entry into CoC. Those pleas are scheduled for hearing on March 7.
 
Sources added that the lenders to Reliance Naval, who are keen to resolve the bankrupt firm at the earliest, are prepared to argue against the Gandhi’s plea on multiple grounds including informing the court about the attempts of the erstwhile promoters to gain a backdoor entry into the resolution process. 
 
The lenders are hoping to put the winning bid to a formal vote at the earliest and prevent the liquidation of the shipyard and its assets.
 
Reliance Naval is touted as a world class facility in the private sector and is said to possess the second largest dry dock globally.

Also read: EXCLUSIVE: Nikhil Merchant wins race to acquire Reliance Naval