David vs Goliath: Battle lines drawn between Hotel Leelaventure and ITC

The brewing corporate battle between ITC Ltd and Hotel Leelaventure would put the spotlight on the rights and the responsibilities of a player that is both lender and equity holder

Last week, tobacco-to-hotels major ITC Ltd filed a petition in the National Company Law Tribunal (NCLT) under Section 241 of the Companies Act, 2013, accusing Hotel Leelaventure of oppression and mismanagement in the proposed sale of four hotels and property to Canadian private equity player, Brookfield.

Letters of objection were also filed with the Securities and Exchange Board of India (Sebi) by ITC, and state-owned Life Insurance Corporation (LIC), a move that has made the market regulator put the deal on hold. This has prompted experts to question whether minority shareholders — with sizeable financial clout — could turn this seemingly David Vs Goliath tale on its head.

Goliath, in this case, debt-laden Hotel Leelaventure, owes about Rs 3,781 crore (as of March 31, 2018) to lenders, while the diversified ITC group with revenue of around Rs 44,000 crore in FY18, plays the David. What would also put to test in this upcoming corporate battle are the rights and responsibilities of a player that is both a lender and equity holder.

The NCLT has not admitted ITC’s case as Leela and JM Financial Asset Reconstruction Company — both a lender and equity holder — said that admitting the case would mean granting a waiver to ITC, which they would contest in the next hearing on June 18. ITC, in its turn, would have to prove its locus standi.

ITC has an 8.72 per cent stake in the company. But prior to the conversion of part of JM Financial's loan into equity, it stood at 11.78 per cent. JM Financial had acquired 26 per cent of the share capital of Hotel Leelaventure in September 2017 by converting part of it loan amounting to about Rs 275 crore.

In its petition, ITC has sought cancellation of the issue and the allotment of the shares. It has also sought a waiver of the requirement of the minimum threshold of 10 per cent shareholding for maintainability of the petition.

For maintainability, a petition under Section 241 has to be filed by not less than 100 members of the company or not less than one-tenth of the total number of members, whichever is less, or any member or members holding not less than one-tenth.

There are, however, precedents of a waiver — the most famous being Cyrus Mistry's petition against oppression and mismanagement in respect of Tata Sons where the National Company Law Appellate Tribunal had granted a waiver.

The NCLT had said the Mistry group's petition was not maintainable as it did not hold the minimum 10 per cent shares required under Section 244. While Mistry held 18.37 per cent of equity shares of Tata Sons, it represented only 2.1 per cent of the total share capital (including preference shares).

A petition under Section 241 can be filed on grounds that the affairs of the company are being conducted in a manner prejudicial to the company, any other member or public interest. A shareholder, per se, has no right over the property unless it can show the sale of the property was not in company interest but was in breach of commercial proprietary and would benefit shareholders directly and indirectly in control of the company, said N G Khaitan, senior partner, Khaitan & Co.

ITC’s main contention is that the Brookfield transaction would leave Leela as a shell company with only liabilities, benefitting the promoters, who would at least receive Rs 300 crore while minority shareholders, including ITC Ltd, would be holding worthless shares with no underlying business or assets.

After ITC’s legal move, sources close to the deal had, however, questioned how a minority shareholder (ITC) would benefit if the company turned insolvent. The transaction was aimed at clearing borrowings of banks and financial institutions.

Nishant Singh, partner at IndusLaw, pointed out that opposing minority shareholders could also join hands. LIC, which has also raised objections, holds 2.36 per cent in Hotel Leelaventure. “This is a technicality and it can file a petition jointly.” In that case, the requirement of 10 per cent shareholding would be met.

Sebi, in its letter to Hotel Leelaventure, while pausing the deal, had said that it had received a letter from LIC, a minority shareholder. ITC had also sent a complaint letter to Sebi which had sought Hotel Leelaventure’s comments on the alleged violation of provisions pertaining to related party transactions. The company has said it will abide by the directions of Sebi that none of the transactions proposed in its postal ballot notice will be acted upon till further directions from it.

ITC’s petition said, on the face of it, the transaction involves a number of related-party transactions with the promoters and their affiliates and confers substantial benefits on the promoters. “It seems a large chunk of the money is going to the promoter shareholders, which hasn't gone down well,” said Krishnava Dutt, managing partner, Argus Partners.

The transaction also puts the spotlight on JM Financial Financial Asset Reconstruction Company. ITC has alleged the transaction was aimed at paying off JM Financial Asset Reconstruction Company, which has significant influence and is a related party. JM Financial Limited, the parent entity, is the exclusive advisor to Hotel Leelaventure in relation to the transaction.

Proxy advisory firm SES had advised shareholders to vote against the sale of Leela’s assets to Brookfield as it had not provided a valuation report on how the consideration for the slump sale was arrived at.

It said there was a lack of clarity on the future of the company and cast doubts over parallel transactions between the buyer and the promoter. According to SES, the promoters should not cast their vote on the resolution as good governance practice.

The company's postal ballot notice for the transaction mentioned that promoters had provided their express consent to vote in favour of the resolutions for the transaction. The voting results show that the sale resolution was passed with 86 per cent of votes in favour; all the promoters polled in favour while 74.9 per cent of public institutional investors supported it.

All about section 241

What it says?

Section 241 under the Companies Act, 2013, provides relief to minority shareholders against oppression and mismanagement

Who has the right to apply under this Section?

In case of a company having share capital, the following can apply:

(a) Not less than 100 members of the company or not less than one tenth of the total number of members, whichever is less; or

(b) Any member holding not less than one tenth of the issued share capital of the company

The central government may itself apply to the NCLT under this chapter  

The Ministry of Corporate Affairs had filed a petition under Section 241 against Unitech and the NCLT had allowed the government to take control. However, the Supreme Court stayed the order

Is there an exception to the rule?

Under Section 244, the tribunal can waive any or all of the requirements