As Party Ends for Vijay Mallya, What Legal Recourse Do Banks Have?

Mallya’s bad debts have wiped out the good times. Banks have a long road ahead in the recovery process.

Over the last few weeks, liquor tycoon Vijay Mallya has dominated news headlines. But in these reports, he doesn’t star as the ‘King of Good Times’. The headlines are not about the Kingfisher Calendar or the Formula One. This time the enormous debts, taken over years, have come home to roost.

We know Mallya’s Kingfisher Airlines has long been grounded (in 2012) and he’s been engaged in a tussle with the banks to pay up. This time, banks made a fresh clamour for their moolah when Mallya stepped down as chairman of United Spirits, with a fat paycheck of Rs 515 crore from its holding company, Diageo.

State Bank of India, leading a consortium of 17 PSU banks, which had all given loans to Mallya at some point, moved the Debt Recovery Tribunal in Bangalore, the Karnataka High Court, and subsequently the Supreme Court in an effort to recover even a trifle of the Rs 9,000 crore Mallya owes these banks.

Well, the story is more complicated, but let’s get down to the brass tacks. To start off, let’s understand what the banks want from Mallya and what the endgame could be. We spoke to Kosturi Ghosh, partner with Trilegal to find some answers.

Can the Banks Access Mallya’s Rs 515-Cr Diageo Payout?

Apart from the personal assets Mallya has pledged with the consortium banks, he has also provided personal guarantees to the banks against the loans availed by KFA. In such event, the consortium banks will be able to enforce their rights against the collaterals provided by Mr. Mallya and his other personal assets (including the payout of Rs 515 crore by Diageo) as part of their recovery proceedings.

Banks May Have Acted a Bit Late But Does That Spoil Their Chances?

Much has been written in the press about the banks’ role. However we will never really know what due diligence process was carried out by the banks before the money was lent. Once lent, however, the right to recover the loan in law is good and should not weaken the case since a failure to pay would be a breach of contract.

If KFA Tells the Courts, Can’t Pay up, Then What?

The consortium banks can look at commencing winding up proceedings against KFA or exercise their rights over properties and assets secured against the loans. As we understand, the collaterals provided to the banks against the loans availed by KFA include an immovable property each in Goa and Mumbai, all trademarks under the KFA brand, fixed assets of KFA, two helicopters, around 17 million shares of various companies headed by Mr. Mallya including Mangalore Chemicals and Fertilisers Limited (MFCL), USL and McDowell Holdings Limited (MHL), 11 leased aircraft and around 115 million shares of KFA. With respect to the shares pledged by Mr. Mallya with the banks, the shares of KFA are more or less worthless as KFA is a defunct company. Reports also mention that most of the aircraft leased by KFA have been taken back by the leasing companies and that the two helicopters pledged by KFA are not in flying condition.

Let’s Get Real. How Much Can the Banks Really Recover?

According to the Special Leave Petition filed by the consortium banks before the Hon’ble Supreme Court of India, an amount of Rs 9,000 crore is owed by Mr. Mallya along with three others (KFA, UBHL and Kingfisher Finvest (India) Limited or KFIL) to the consortium banks. Though reports say that Mr. Mallya has provided a personal guarantee of Rs 1,500 crore to the banks against the loans availed by KFA, it may be difficult to provide a concrete answer as to how much money the consortium banks will be able to recover. However, in the event the assets already charged with the banks do not meet the liabilities of KFA, the banks will be able to exercise its rights over other assets owned by Mr. Vijay Mallya, KFA, UBHL and KFIL by virtue of the personal and corporate guarantees given by them to the banks.

Can the Banks Tap Mallya’s Personal Property?

Yes. Since Mr. Mallya has provided personal guarantees to the banks against the loans availed by KFA, the banks will be in a position to tap Mr. Mallya’s personal assets as part of their recovery proceedings.There have been instances in the past where Mr. Mallya’s assets have been auctioned as part of recovery proceedings, e.g., the private jet owned by Mr. Mallya was auctioned in April 2015 by the Mumbai International Airport Limited as part of its bid to recover airport dues accumulated by KFA.

Okay, But What About the Stuff That he Controls But Strictly Doesn’t Own?

No. The banks cannot usually have access to the properties not owned but controlled by Mr. Mallya (by virtue of his position in an institution or otherwise). The banks can recover their money only from its borrowers and guarantors and not out of any properties or institutions controlled by them.

Short point, while the banks have some options to recover their debt, that may be a far cry from the amount that Mallya’s really owes and it’s likely that a lot of it may have to be written off. And the legal wrangles won’t end any time soon. In the next edition, we’ll look to understand how the current tussle could progress from where things stand, as of now.