US-based fund DVI invokes force majeure clause in Amtek's debt resolution

While a force majeure clause is common in commercial contracts, in an IBC case, the committee of creditors (CoC) generally doesn't agree to including such a clause in the resolution plan

In a rare instance in the Insolvency and Bankruptcy Code (IBC) regime, US-based investment fund Deccan Value Investors (DVI) has triggered the force majeure clause in Amtek Auto debt resolution case, citing deteriorating performance of the corporate debtor in the wake of the Covid-19 pandemic.

DVI confirmed this, stating it had submitted its resolution plan for Amtek Auto in January, in good faith and with a detailed strategy to revive Amtek’s fortunes.

“In March, Covid-19 triggered an immediate and accelerating deterioration in industrial activity across the economy. The impact was severe on the auto sector and Amtek’s financial position worsened quickly, rendering DVI’s commercial assumptions for the company redundant,” added DVI.

It further said that DVI’s resolution plan states that any material impact on Amtek’s performance due to a pandemic would allow DVI to exercise force majeure.

While a force majeure clause is common in commercial contracts, in an IBC case, the committee of creditors (CoC) generally don’t agree to including such a clause in the resolution plan. However, when DVI submitted its plan in January, Covid-19 had already hit China, and creditors agreed to grant protection under the clause.

Legal experts said, irrespective of whether a force majeure clause is present in the plan or not, bidders were increasingly looking to renegotiate resolution plans with the CoC. Krishnava Dutt, Managing Partner, Argus Partners said, there are many cases where bidders are looking to withdraw due to Covid-19. As long as they can prove what they had bid for and what they now have on hand, is completely different, they have a case. "This is the next issue that will now play out," he said.

Suharsh Sinha, Partner, AZB & Partners, too, said, bidders are negotiating with the CoC to either walk away or reduce the price. In at least one, the Digjam case, the NCLT allowed revision/modification/relaxation in the resolution plan in respect of the timeframe for the payment to creditors on account of the pandemic.

It is understood that DVI wrote to the lenders earlier this month, triggering the force majeure clause. Sources familiar with the matter indicated that under the current terms, it wouldnot be possible for the company to implement the resolution plan since the commercial premise had changed.

The force majeure clause had thresholds on performance, under which the plan would no longer be viable, they said.This could further complicate matters for Amtek resolution. The corporate insolvency resolution process (CIRP) for Amtek has been running for more than three years now. 

Amtek was on the Reserve Bank of India’s first list of non-performing assets mandated for debt resolution under the IBC. The CIRP was initiated after Corporation Bank moved an application in the National Company Law Tribunal (NCLT).

Amtek owes lenders around Rs 12,500 crore. The DVI bid is believed to be Rs 2,700 crore, of which Rs 500 crore is the upfront cash component, the balance Rs 2,200 crore would be paid from future cash flows. The plan had secured 70.07 per cent votes of lenders.

DVI had earlier filed an application in the Supreme Court, seeking extension of time to discuss the terms with the CoC and to assess the impact of Covid-19. However, the application was dismissed by the apex court.

Land dispute

Regardless of the pandemic, however, DVI’s plan had run into hurdle over land dispute, a matter which is in the National Company Law Appellate Tribunal (NCLAT).

DVI said it had built into its resolution plan and contract, certain condition precedents without which the deal could not proceed.

“One such condition precedent related to an ongoing dispute between the creditors and leaseholders of a key plot of land on which Amtek’s manufacturing facilities stand. All of these matters will now be adjudicated by the courts. DVI is confident of its position and looks forward to a final outcome that upholds the sanctity of contract under the IBC,” it added.

The condition precedent relates to a mortgaged property, the ACE Complex land, which had come up when the resolution professional (RP) had filed for approval of DVI’s resolution plan in the NCLT in June.

Vistra ITCL (India), as security trustee of KKR India Financial Services and L&T Finance, had filed an interlocutory application before the NCLT against the RP and the CoC for the ACE Complex land, over which it has mortgage rights.

It had sought relief that the land — a secured property/mortgaged property — should be kept outside the CIRP of the corporate debtor as well as outside the confines of any resolution plan.

Amtek’s factories — five separate units that account for about 40 per cent capacity — are on this land.

The owner of the land, Gateway Impex, however, executed a lease deed in January, and the NCLT order had not considered the lease agreement. The DVI plan got the NCLT approval in July.

Thereafter, DVI filed an appeal in the NCLAT against the order. Vistra ITCL, too, filed a caveat and the appellate tribunal allowed it to file an application, seeking impleadment. The matter is likely to come up for hearing on Monday; the invocation of the force majeure clause is also expected taken up then.

Sources familiar with the Amtek issue said that without protection, the valuation of the bid would have been much lower.

Clauses, including force majeure, long-stop date, and land lease, were negotiated with banks to build comfort and robust contractual protection for risk-taking by buyers, they added.

This is the second time that the resolution process for Amtek has hit a roadblock. It had to be started afresh due to non-implementation of Liberty House’s plan. In the first round, DVI was the other bidder, apart from Liberty House Group.