Madras HC orders against ING Vysya's move to announce Orchid Pharma as wilful defaulter

The Court says that the decision is taken keeping the larger public interest in mind, as 25 other banks are involved

The Madras High Court has issued an order in favour of a petition filed by Orchid Chemicals and Pharmaceuticals Ltd (OCPL) against ING Vysya Bank's move to declare the company as a wilful defaulter. It may be noted that the Bank has earlier approached the Debt Recovery Tribunal against the execution of the business transfer agreement of OCPL with Hospira Healthcare, to transfer some business and assets of OCPL to the latter.

The dispute started after the Bank has sanctioned unsecured working capital limits of Rs 40 crore to OCPL in September 2001, which the company defaulted. It has also defaulted in payment to a consortium of Banks as well as to the other banks and submitted a proposal in June 2013 to the CDR cell for restructuring of the debt, which was later passed by the CDR Empowered Group.

ING Vysya, which opposed the CDR package, filed a complaint with the Debts Recovery Tribunal and while things were moving before the Tribunal and the Appellate Tribunal, the Bank first issued a show cause notice to the writ petitioners for classifying them as wilful defaulters. To this notice issued in April 2014, the company submitted its objections which was later heard in a Grievance Redressal Committee. It was against the resolutions of the Committee to declare the company as wilful defaulters and the threat issued by the Bank to publish the photographs of the Chairman and Managing Director of the company as well as the guarantor in newspapers as wilful defaulters, the company approached the Court.

In his order, Justice V Ramasubramanian allowed the writ petitions of the company and setting aside the decision of the Bank and the Committee in challenge, keeping the larger public interest.

The Justice, while considering the petition of OCPL and the arguments of the Bank, said but for the existence of some special facts, the writ petitions submitted by the company deserve to be thrown out without any mercy, for two reasons. However, the Court decided to consider the contentions, keeping in mind the larger public interest that is also at stake along with the private interest of the petitioners, with a CDR package has been put in place by a group of 25 banks and financial institutions and the fate of these institutions is also linked with the fate of the company.

He observed that the conduct of the petitioner in utilising short term working capital for long term purposes as a clear violation of the terms and conditions of the sanction of the loan and the repeated assurances given by the company that payments due from its customers would be remitted towards repayment of dues to the Bank and the ultimate disclosure of the fact that instead of routing the payments directly to the Bank, the company had taken the receipts for themselves, clearly indicate that the company had taken the lender for a ride.

The company argued that the decision of one bank, whose stakes constitute just two% of the borrowings of the company cannot sabotage the CDR package approved by a group of 25 banks and financial institutions, having about 98% stakes in the borrowings of the company.

"To summarise the whole things, the declaration of the petitioners as wilful defaulters will not bring any benefit to the second Respondent, but it will be detrimental to the interest of the petitioners as well as other lenders. Hence, I am of the view that the petitioners are entitled to the relief sought, at least in the interest of a large body of creditors," said the Judge.

Once the declaration of a wilful defaulter is made, the ventilator has to be removed and the company would automatically become dead. Even then, the second Respondent may not get anything, as it is an unsecured creditor, observed the Court.

It also observed that what the Bank is attempting to do, appears to be contrary to the larger interest of the whole body of creditors and there is no reason as to why a large body of creditors numbering about 25 whose dues constitute about 98% of the total dues of the company, should support the borrower, if the unit was not viable.

As per the submission of State Bank of India, which heads the group of lenders, the company had availed credit limits to the tune of Rs 2100 crore and had also availed external commercial borrowings to the extent of $ 161 million from the Consortium of Banks.