Amazon opposes insolvency petition against Future Retail

Even as the Indian Bank Consortium on Thursday requested the National Company Law Tribunal (NCLT) to urgently admit its application for initiating insolvency proceedings against Future Retail Ltd, Amazon has opposed the consortium’s insolvency application, alleging that the banks had colluded with FRL and that any bankruptcy proceedings at this stage will compromise the ecommerce company’s rights.

The NCLT will hear Amazon’s arguments in its next hearing on June 6.

Amazon has moved an intervention application under section 65 of the Insolvency and Bankruptcy Code before the NCLT which deals with provisions relating to penalty for fraudulent or malicious initiation of proceedings.

Meanwhile, in letter addressed to the Reserve Bank of India and other the consortium banks, the US-based e-commerce giant has tried to apprise those addressed in the letter of the fraud committed by Future Retail Limited, including its promoters and directors on account of purported disposal and removal of Future Retail Limited (FRL)’s assets.

We produce the content of the letter verbatim.

We, Amazon, write to you in furtherance to the Letter dated 28 April 2022, to bring to your notice recent developments which have culminated into shockingly collusive actions on the part of FRL, the MDA Group and the lender banks of FRL. By virtue of this letter, we detail the said collusive actions of FRL and its lender banks, which not only are in complete contravention of Amazon’s pre-existing rights, but also completely against the interests of public depositors and retail investors.

It is the duty of banks in India, more specifically, public sector banks to ensure compliance of fiduciary duty towards the public. However, lender banks of FRL have acted in a completely irresponsible and collusive manner, despite having knowledge of FRL’s illegal actions. Thus, the 7 present letter is being issued requesting for an investigation to be carried out with respect to these collusive actions of FRL, and all its lender banks for the reasons detailed below.

BACKGROUND

On August 29, 2020, in blatant violation of its agreements with Amazon, FRL and its promoters purported to enter into the Impugned Transaction, which envisages the cessation of FRL as an entity and the complete disposal of FRL’s retail stores in favour of the MDA Group. The Impugned Transaction was in breach of various obligations owed to Amazon, and accordingly, was challenged by Amazon by way of the Arbitration Proceedings.

The Emergency Arbitrator appointed under the Rules of Arbitration of the Singapore International Arbitration Centre, 2016 (“SIAC Rules”) injuncted FRL, and its Promoters from proceeding with the Impugned Transaction, and restrained FRL from alienating/disposing of its retail assets in any manner, without Amazon’s consent. These injunctions were upheld by the duly constituted Arbitral Tribunal, and were held to be enforceable as an order of the Court by the Hon’ble Supreme Court. The injunction orders continue to be binding, valid and operative.

The Impugned Transaction was proposed to be implemented through a court-approved Scheme, and required amongst other things, the approval of the shareholders and creditors of FRL and the National Company Law Tribunal.

On April 22, 2022 FRL, Future Lifestyle and Fashion Limited (“FLFL”) and Future Enterprises Limited (“FEL”) filed separate disclosures to the Indian Stock Exchanges, attaching the corresponding scrutinizers’ report in relation to the meetings of equity shareholders, secured creditors and unsecured creditors of, inter alia, FRL, FLFL and FEL.

On April 23, 2022, RIL, i.e., the flagship entity of the MDA Group, also filed a disclosure with regard to the rejection of the Scheme by the secured creditors of FRL before the Indian Stock Exchanges. The aforesaid disclosures reflected that the Scheme could not be implemented as the secured creditors of FRL (as well as FLFL and FEL) voted against it.

CONDUCT OF THE LENDER BANKS IN AIDING AND ABETTING FRL TO SELL THE SMALL STORE FORMATS

While the Scheme was in the process of being implemented, FRL adopted another fraudulent approach in an attempt to transfer its retail assets to MDA Group i.e. under the garb of a One-Time Restructuring Resolution Framework, which was envisaged under the RBI Circular dated August 6, 2020 titled “Resolution Framework for Covid-19 related stresses” in respect of eligible borrowers facing adverse financial implication due to Covid-19 pandemic” (“OTR”). As per the OTR documentation/ resolution plan, FRL was obligated to (a) sell small-format stores i.e. Easyday Club and Heritage Fresh to mobilize funds of INR 3,000 Crores by December 31, 2021 and (b) undertake equity infusion of capital to raise INR 3,000 Crores by March 31, 2022 (“OTR Resolution Plan”). This was in complete violation of the binding injunctions as well as Amazon’s legal rights.

Accordingly, on April 24, 2021, Amazon, in the Letter dated 24 April 2021, had brought to your notice (as well as to the notice of all lender Banks) that FRL’s retail assets could not be transferred/alienated/sold/disposed of in any manner without Amazon’s consent. In the Letter dated 24 April 2021, Amazon had also enclosed a copy of the letter dated April 23, 2021 addressed to FRL, wherein Amazon reiterated its rights under the Agreements, including the requirement of Amazon’s prior written consent for transfer of any retail assets by FRL. Further, Amazon expressed its readiness and willingness to find commercial solutions for FRL, while respecting the Agreements executed between them.

Despite the lender banks of FRL having knowledge of the fact that FRL’s OTR Resolution Plan was in complete violation of Amazon’s rights under the Agreements and in contravention of the EA Order, they proceeded to enter into a formal agreement with FRL i.e. framework agreement dated April 26, 2021 (“Framework Agreement”) and other related documents, whereby FRL proposed to sell part of its retail assets (small format stores) to raise funds of approximately INR 3000 Crores in order to pay off its “debts”.

It is imperative to highlight that the lender banks failed to even look at the undisputed fact that FRL and its Promoters lacked the basic authority, and capacity for executing the Framework Agreement and other related documents, as there was a binding injunction on FRL from alienating/disposing of its retail assets in any manner, directly or indirectly, without Amazon’s consent. Even with the knowledge that FRL could not dispose of its retail assets without the prior written consent of Amazon, the lender banks executed the Framework Agreement, accepting completely illegal representations and warranties of FRL, in which FRL provided:

The Borrower has full corporate power and authority to enter into this Agreement and to take any action and execute any documents required by the terms hereof. This Agreement constitutes its legal, valid, and binding obligation enforceable in accordance with the terms hereof;

a. The Borrower has been duly empowered and authorized to execute the same and to perform all its respective obligations in accordance with the terms contained herein;

b. The Borrower owns/possesses the property, assets and revenues on which it has granted or purports to grant Security Interest under the Financing Documents.

c. There are no Legal Proceedings pending or any written notices received which would result into any Legal Proceedings, in India or any other jurisdiction, (a) against the Borrower and (b) regarding the effectiveness or validity or performance of any of the Financing Documents (to which the Borrower is a party), which as per the terms hereof should have been executed or obtained prior to the date on which the representation is being made or repeated.

d.Such conduct on the part of FRL (in concert with the lender banks) is completely fraudulent and is an attempt to gravely prejudice the rights of Amazon. The Framework Agreement is therefore a complete nullity in law.

In furtherance to the Framework Agreement, communication between FRL and the lender banks continued, which clearly makes out a case of collusion between FRL and the lender Banks:

a. On December 11, 2021, FRL wrote to the Bank of India that it had aligned potential buyers for the sale of its small format stores. Subsequently, on December 15, 2021, a consortium meeting took place in which the Promoters of FRL provided an update on legal matters with Amazon. Thereafter, the parties in concert with each other further discussed the course of action with regard to the sale of small format stores by the lenders enforcing their right over security. It was collectively decided that progress should be made towards forming an “Asset Sale Committee” to drive the process.

b. On December 31, 2021, FRL wrote to Bank of India stating that operations and the prospects of concluding the deal with the MDA Group have improved and requested the lenders to drive the sale of small format stores. FRL further requested the lenders to let FRL continue in operation till the sale of small format stores has concluded or the Scheme is implemented, whichever is earlier. The collusion between FRL and its lender banks is also evident from the fact that FRL also 9 requested the lender banks to file an intervention application in the proceedings between FRL and Amazon seeking early closure of the matters.

c. The Core Lenders Committee in its meeting held on January 01, 2022 proceeded to deliberate on the following matters: (1) Formation of asset Sale committee for sale of small format business; (2) Cash flow approval for the quarter ending March 2022; and (3) Holding on operations requested by FRL.

d. Subsequently, Bank of India on January 11, 2022 wrote to FRL and its Promoters alleging breach of its rights under Clause 9.3 of the Framework Agreement.

d. Bank of India called upon the FRL to: (1) symbolically handover the business/ assets comprised in Heritage Fresh business and the Easyday Club business to the Security Trustee; (2) Undertake to handover physical control and possession of business/ assets of Easyday Club and Heritage Fresh to the Lenders; (3) Undertake to cooperate in the entire process of selling the identified assets within the timelines by Lenders; (4) Provide due diligence access; (5) Obtain consent from Reliance Retail Ventures Limited and its affiliates for sale, handover, delivery and/ or transfer of Easyday Club and Heritage Fresh business; (6) Pay/ reimburse all costs and expenses for such process; and (7) Indemnify the Lenders and their advisors, counsels, valuers and other consultants. Such actions were sought in complete disregard of the injunctions in place against FRL, which were well within the knowledge of the lender banks.

e. On January 19, 2022, Amazon wrote to the independent directors of FRL expressing its willingness to extend financial assistance to FRL and facilitate the infusion of an amount of INR 70,00,00,00,000/-, in collaboration with an institutional investor i.e. M/s. Samara Capital. In response, the Independent Directors of FRL vide letter dated January 21, 2022 raised vague, absurd objections and evasively stated that Amazon’s proposal was not a comprehensive solution for all concerned stakeholders.

f. Subsequently, Amazon vide letter dated January 22, 2022, responded to the Independent Directors of FRL again reiterating its willingness to assist FRL in servicing its debt obligations. Amazon also highlighted that creation of any charge/ encumbrances over the retail assets without its prior consent would be contrary to binding terms of the Agreements and the EA Order. Amazon also reiterated the fact that a resolution of certain unadjusted transactions, advances or deposits with related parties of FRL would have taken care of FRL’s short term funding requirements as well as have ensured that FRL has liquidity to service its debts immediately without having to resort to the OTR mechanism envisaged under the RBI Circular. In response to the aforesaid letter, the Independent Directors of FRL vide letter dated January 25, 2022, again evasively stated that the Amazon’s proposal was not viable or concrete and would be insufficient to service FRL’s debt obligations. FRL also evasively communicated its unwillingness to engage in any further discussions with regard to Amazon’s proposal to assist FRL in finding commercial solutions. Amazon responded to the aforesaid letter, vide its letter dated January 27, 2022, whereby Amazon expressed its disappointment over the baseless rejection of its proposal for financial assistance and stated that such conduct is entirely contrary to the role and functions of the independent directors under Indian law.

The aforesaid correspondence clearly demonstrates that resorting to the OTR mechanism and entering into the Framework Agreement was merely a deliberate ploy employed by the FRL to sell its retail assets to the MDA Group and not a result of “financial distress” of FRL. The lender banks have participated in these actions despite having knowledge of such actions by FRL.

As it has turned out, the lender Banks and FRL have now become willing collaborators in a fraudulent stratagem which is being played out to alienate the substantial majority of FRL’s retail 10 assets in favour of the MDA Group. These developments come in the wake of repeated statements made by FRL to the Constitutional Courts that its retail assets would continue to vest in FRL until the final order of sanction of scheme.

On 26 February 2022, FRL issued the 26 February Disclosure to the Indian Stock Exchanges stating inter alia: “Termination notices have been received for significant number of stores due to huge outstanding, and we would no longer have access to such store premises.”

FRL did not disclose the identity of the person(s)/entity(s) which had issued the purported “termination notices” or the nature of the arrangements pursuant to which such “termination notices” were received. In fact, it was for the first time that FRL even disclosed that it had “huge outstanding” in relation to its use and occupation of the store premises.

On March 9, 2022, FRL filed another disclosure before the Indian Stock Exchanges stating for the first time that as many as 835 of its retail stores, which accounted for 55-65% of the total revenues generated by FRL’s retail business, were being “forcibly” taken over by the MDA Group. At the same time, FRL gave no details of the basis/arrangements under which the MDA Group issued the purported termination notices.

On 16 March 2022, FRL made yet another disclosure purporting to give details of the arrangements entered into with the MDA Group in February-March 2021. FRL did not give any reason as to why such purported arrangements were never disclosed to any statutory authority/regulator. Further, the fact that all such purported arrangements were conducted with only one counterparty, viz. the MDA Group demonstrates that the recent course of events has been a carefully designed stratagem to overcome binding injunctions and erode the value of FRL. Further, it is evident from the 16 March Disclosure that the purported handover of the retail stores is not simply on account of “termination” of any arrangement, but is an attempted transfer of the entire retail business of FRL to the MDA Group de hors the Scheme. FRL has clearly stated in the disclosure that the erstwhile employees of FRL have en-masse joined entities belonging to the MDA Group.

It is telling that neither FRL nor the lender Banks have taken any action whatsoever to prevent the MDA Group from taking over the retail stores.

The aforesaid sequence of events makes it abundantly clear that the lender banks and FRL are in collusion with each other to obstruct the legal rights of Amazon.

Moreover, one of the lender banks i.e. Bank of India has filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) i.e. C.P.(IB)-527(MB)/2022 (“C.P.(IB)- 527(MB)/2022”) in a completely fraudulent and malicious manner for purposes other than resolution of debt. Such actions on the part of lender banks are a complete misuse of the provisions of the IBC and malicious abuse of the process of law.

As demonstrated hereinabove, it is clear that the lender banks and FRL have consistently acted in collusion in order to obstruct and defeat the rights of Amazon. It is further submitted that by the virtue of C.P.(IB)-527(MB)/2022, FRL through Bank of India seeks to achieve initiation of CIRP in order to take undue advantage of the provisions of Section 14 of the Code, to seek an illegal interdiction against the Arbitration Proceedings against FRL and other related proceedings pending before various Courts. Thus, C.P.(IB)-527(MB)/2022 has merely been filed by FRL in concert with the lender banks, with a deliberate design. Such actions cannot be permitted and statutory authorities must hold the lender banks liable for such malicious conduct and initiate appropriate actions.

A party cannot be allowed to get away with the consequences of false statements, material misrepresentation and collusive acts. Despite Amazon’s pre-existing rights, the fraudulent and malicious insolvency proceedings initiated by the lender banks in concert with FRL, if allowed, will leave no accountability in relation to FRL’s retail assets.

It is submitted that it was the duty of the lender banks, some of which are public sector banks, to forensically investigate the serious misconduct of FRL, in line with fiduciary duty towards the public. However, interestingly, no such investigation was carried out by any of the lender Banks whatsoever. In fact, the lender Banks of FRL mala fide chose to turn a blind eye towards credible information brought to their notice by Amazon with regard to the illegal steps being taken by the FRL in violation of the injunctions in place.

The collusion between the parties and the attempt to sell the small store formats through the Framework Agreement is clearly a part of an overall device to transfer/dispose of FRL’s retail assets in favour of the MDA Group in the teeth of binding injunctions. As it turned out, the lender Banks and FRL then became willing collaborators in a fraudulent stratagem which is being played out to alienate the substantial majority of FRL’s retail assets in favour of the MDA Group. The purported initiation of proceedings for insolvency resolution by the Bank of India is the latest attempt to whitewash the fraud that has been committed not only on Amazon but also the statutory regulators, lakhs of retail investors and other stakeholders. Such conduct, including on the part of the lender Banks, establishes the fact that the lender Banks have given FRL a reprieve by taking it into insolvency without seeking accountability from the Promoters, board members and management of FRL, and conducting proper investigation.

Thus, in light of the aforesaid, it is requested that your good offices take serious cognizance of such fraudulent actions on the part of the lender banks of FRL, given the fact that it is their fiduciary obligation to ensure that all actions undertaken by them are in the interests of the public at large. Further, it is imperative that a forensic investigation is undertaken by your good offices to safeguard the interests of Amazon, public depositors and retail investors of FRL.

This letter is issued without prejudice to our rights.

Yours Sincerely, For Amazon.com NV Investment Holdings LLC

Also Read: Future Retail moves SC against lenders; here’s the gist of the petition