Amazon Vs Future Group: Time For Shoulda Woulda Coulda Is Up. What Next?
Much of the focus in the two-year-old-and-counting litigation between Indian retailer Future Group and American e-commerce giant Amazon will now move to insolvency courts.
Future Retail Ltd.'s creditors should’ve acted sooner. Maybe, the company would’ve had a better chance of survival. It would have also helped avoid or sidestep the many legal questions that courts have spent hundreds of hours deliberating on.
For instance, can the competition regulator suspend its approval to a transaction? Can non-signatories to an arbitration agreement be made parties to the arbitral proceeding? Is Future Retail in violation of arbitral tribunal and court orders because it allowed Mukesh Ambani’s Reliance Projects and Property Management Services Ltd. to take over its leases?
All these legal questions will be moot the moment Bank of India’s insolvency application is admitted by the National Company Law Tribunal.
The technicalities of the law should not shroud the commercial reality of the case, says Promod Nair, arbitration law expert and founder at Arista Chambers.
In practical terms, he says, Reliance has been able to cherry-pick and take over the best physical assets of Future Group. If there are any other assets it would like to pursue, this can be done within the framework of the imminent insolvency proceedings, which would also be available for a much lower price than was previously the case, Nair adds.
The practical effect of commencement of insolvency would be the declaration of a moratorium which would, in turn, have the effect of putting on hold arbitration proceedings against Future Retail. The arbitration is likely to grind to a halt shortly and even if it doesn't and results in a damages award against the Future Group, there is unlikely to be sufficient assets against which an award can be enforced.Promod Nair, Founder, Arista Chambers
Agrees Rajat Sethi, partner at law firm S&R Associates. He questions whether the arbitral proceedings can continue even against the promoter entities.
The context of the contractual dispute between Amazon and Future Group no longer exists, Sethi says. It was the asset sale of Future Group entities via the scheme of arrangement which has been voted down by the secured creditors.
The arbitration in Singapore and the related disputes in Indian courts become academic now. In any event, once the insolvency application is admitted, there will be a moratorium on all legal proceedings against Future Retail.Rajat Sethi, Partner, S&R Associates
Including the one before the Delhi High Court where Amazon is contesting the "purported hand over of FRL’s retail assets to the Mukesh Ambani Group".
The Jeff-Bezos founded company has evidenced this in court by relying on two surrender deeds executed by Future Retail. One dated Dec. 31, 2020, with MEL Properties Pvt. for leasing the premises at Coconut Avenue Road, Malleswaram, Bangalore. And another one dated March 11, 2021, with Flicker Projects Ltd. for leasing the premises in Forum Celebration Mall, Udaipur.
The latter, Amazon says, did not contain any statement that the lease was being surrendered on account of non-payment of lease rent. Similar such surrender deeds were entered into for premises in other parts of India, it has told the high court.
Future Retail is yet to respond to BloombergQuint's queries on these claims.
Who has the locus to fight this, countered corporate lawyer Murali Neelakantan when asked if Amazon is left with any recourse. This strategy has been used by corporate India earlier as well, when say minority shareholders would hold up scheme approvals, he adds.
Future Retail can’t tell the lessors to not cancel the lease if rent wasn’t being paid. Which court will now say—evict Reliance, transfer the leases back to Future and bring back the Big Bazaar stores without paying any rent? How is that fair to the lessors?Murali Neelakantan, Corporate Lawyer
Especially, since Future Retail is staring at bankruptcy and has been given two weeks to respond by the NCLT. The provisions under the insolvency law which allow reversal of asset-stripping transactions won’t be helpful either, experts say.
Insolvency law has provisions which allow courts to reverse the effect of transactions which are preferential or undervalued in nature. Resolution professionals are statutorily required to file applications for such avoidance transactions to be nullified.
The first issue the resolution professional will run into is whether these leases were really assets of Future Retail, explains Neelakantan. Though, he adds, it is not unusual for group companies (asset owning entities) to own or have long leases on some assets.
Typically, he points out, retailers (DMart is a notable exception) have short-term leases which, from an accounting point of view, are not seen as assets of a company. So, that’s a factual determination the RP will have to do for each lease, he says.
Preferential transaction is if the insolvent company has discharged the debt of a particular creditor thereby giving that creditor undue preference over other creditors, usually termed ‘fraudulent preference’. Reliance is not Future Retail’s creditor, the unpaid lessors are and neither has been preferred here.Murali Neelakantan, Corporate Lawyer
Similarly, an undervalued transaction is where the corporate debtor transfers its own assets at a significantly lesser value than it holds in its books or can get in the market.
That’s not the case here either, where the lessor have transferred or terminated the leases for default by Future Retail. In short, it’s unlikely the lease transfers can be undone, Neelakantan says.