Zee Entertainment Is A Continuing Defaulter, Says IndusInd Bank

IndusInd Bank Ltd. argued in defence of its insolvency application against Zee Entertainment Enterprises Ltd. that a continuing default cannot get the benefit of the Insolvency and Bankruptcy Code being put on hold.

IndusInd’s counsel, Ravi Kadam, told the court that the object of the circular, which suspended the operation of the Insolvency and Bankruptcy Code, was to exclude any action for defaults that occurred during March 2020–2021. In Zee’s case, the default occurred prior to the suspension period and is therefore a continuous default, which should be actionable under the Code, Kadam said.

According to Zee, the bank’s petition is not maintainable as the invocation of the guarantee took place in April, during which IBC was suspended.

IndusInd had initiated insolvency proceedings against Zee in February 2022 after the latter defaulted on a loan of Rs 83 crore. The liability arose from a ‘Debt Service Reserve Account Guarantee Agreement’ between IndusInd and Zee, under which the company agreed to secure a term loan of Rs 150 crore extended to Siti Networks.

The agreement required Siti to maintain one-quarter’s interest and one-quarter’s principal in the account at least 10 days prior to the date on which principal was due. If it failed, the obligation fell on Zee.

When Siti failed to maintain the requisite balance, IndusInd sent notices in September 2019 and then later in March and April 2020. The bank then sought accelerated payment in September and October of 2020.

When Zee did not pay up, IndusInd initiated insolvency proceedings against it.

Kadam pointed to a letter, signed by Zee’s Managing Director and Chief Executive Officer, Punit Goenka, which shows that the media company accepted its Rs 86 crore liability under the debt service reserve account agreement. Zee countered by saying the letter is merely representative of the aggregate amount of loans advanced and does not represent the company’s liability.

The bank’s counsel said that the notice sent in September 2019 is itself an invocation of guarantee. But as per Zee, the guarantee was invoked in April 2020, when IBC was in suspension. To which Kadam replied that since the default is continuing, it can be the basis of an insolvency application.

Zee then questioned the amount of default itself, saying that it was only Rs 69 lakhs, which doesn’t meet the threshold of Rs 1 crore required to initiate insolvency. Kadam responded that Zee’s liability is co-extensive with that of Siti and therefore not limited to the shortfall in the debt service reserve account. Zee’s liability is for the entirety of the debt owed by the principal borrower, i.e., Siti, which is well beyond the Rs 1 crore requirement. As of Mar. 5, 2020, Siti’s liability in terms of interest stood at Rs 1.99 crore, and in terms of principal, at Rs 83 crore, Kadam told the court.

As per the agreement, the bank has the power to cancel all the loan facilities extended and seek payment for the entire outstanding amount in the event of default, Kadam said. This is a deviation from a plain reading of the limited liability clause under the agreement, according to Zal Andhyarujina, counsel for Zee.

The Mumbai bench of the NCLT has reserved its order.