Zee Insolvency Proceedings Stayed: What Does it Mean for Merger with Sony?

The NCLT had admitted IndusInd Bank’s plea while Zee was reportedly in advanced stages of proposed merger with Sony.

(Image altered by The Quint)

The National Company Law Appellate Tribunal (NCLAT) on Friday, 24 February, stayed an order initiating the Corporate Insolvency Resolution Process (CIRP) against Zee Entertainment Enterprises. 

Previously, on 22 February, the National Company Law Tribunal (NCLT) had initiated the proceedings after a petition seeking the same was filed by IndusInd Bank.

The matter pertains to an alleged default of Rs 89 crore by Zee Group's Siti Networks, for which Zee Entertainment Enterprises Limited (ZEEL) was a guarantor. 

According to media reports, Siti owes a total of Rs 850 crore to nine lenders.

What are Insolvency Proceedings?

According to the Insolvency and Bankruptcy Code (IBC) when any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate a corporate insolvency resolution process.

In case of a default of Rs 1 crore or more, a financial creditor can move the NCLT for initiation of the Corporate Insolvency Resolution Process.

As per the Insolvency and Bankruptcy (Application to Adjudicatory Authority for Insolvency Resolution Process for Personal Guarantee to Corporate Debtors) Rules, 2019, creditors are also allowed to file claims against personal guarantors before the NCLT.

Additionally, a creditor (IndusInd bank in this case) may apply for the initiation of an insolvency resolution process against a personal guarantor (ZEEL here) under part III of the IBC.

What Did NCLAT Say In Its Order?

According to Bar and Bench, a bench comprising NCLAT Chairperson Justice Ashok Bhushan and Member (Technical) Barun Mitra issued notice to respondents and said:

“Reply in two weeks, rejoinder in two weeks thereafter. List for final disposal on 29 March. Till that time, the order dated 22 February is stayed."

 This order came after Senior Advocate Mukul Rohatgi, appearing for Zee, reportedly pointed out that:

• Zee is a corporate guarantor and not the principal debtor

• Zee’s special guarantee, in the matter, was not for Siti’s debt, but for maintaining a shortfall in only one part of the interest repayment account

As per Mint, Punit Goenka, chief executive of Zee, hailed the NCLAT order and said:

"Remain committed towards protecting the interest of all stakeholders. Our focus continues to be on the timely completion of the proposed merger.”

According to reports, the NCLT had admitted IndusInd Bank’s plea, while ZEEL was in advanced stages of its proposed merger with a unit of Sony.

But What Had Happened So Far? And What Does it Mean For Proposed Merger With Sony?

On Wednesday, 22 February, the NCLT gave a go-ahead to insolvency proceedings against ZEEL.

In the immediate aftermath of this, shares of ZEEL fell sharply, by nearly 10%, on Thursday.

Most pertinently, however, the insolvency proceedings (since stayed) heralded hurdles for the Zee-Sony merger — which had been finalised in December last year. This means that if the proceedings had not been stayed, ZEEL would have been unable to immediately go ahead with the merger as, although approved, the merger was yet to attain finality.

Why, though?

“Once the company gets admitted, the powers of the board of directors stand superseded in relation to the corporate debtor (Zee entertainment),” Prachiti Shah, managing partner of law firm Nanavati & Nanavati Advocates was quoted by Economic Times as having said.

Thus prior to the stay — the only other way out, according to Shah, was “for the original promoters to settle the dues with the lenders under 12 (A) for post-admission settlement. Unless and until this occurs, no scheme matters, including merger or amalgamation, will be possible.”

But now that the proceedings have been stayed, the board of directors retain control and it is safe to assume that, at least at the moment, Zee can go ahead with the merger.

(With inputs from Mint, The Hindu and Economic Times.)