UB judgment throws open the question again
A few months ago when Vijay Mallya’s United Breweries Holdings Limited (UBHL) was trying to sell its shares in United Spirits Limited (USL) to British spirits major Diageo, several lenders to Mallya’s broke airline Kingfigher Airlines were aghast. The lenders had various forms of corporate guarantees from United Breweries and didn’t wish to see United Spirits slip away into Diageo’s control once it got another 6.7% of the shares from Mallya—after the inevitable open offer, this is precisely what would happen. While five of these lenders filed a winding up petition against United Breweries Holdings in the Karnataka court and thereby against the sale, the court ruled in favour of allowing the sale, and after Sebi and the Competition Commission were also brought in, Diageo took control of Mallya’s shareholdings and made an open offer. Given that a division bench of the same court has now ruled against the share transfer, Diageo’s control of United Spirits has now run into trouble. Trouble that, it must be said, Diageo anticipated since while announcing the deal in July, it had listed potential risks as “in the event that a winding-up order is passed in respect of UBHL, today’s sale of USL shares … to Diageo …be treated as automatically void.”
Given that both Mallya and Diageo are going to contest the Karnataka ruling in the Supreme Court, the case is nowhere near finished, but it does open up the whole question of creditors’ rights and whether they need a more formal codification. If a company owes money to individuals, or has issued a lot of corporate guarantees on the strength of which various loans have been given to other group companies, can that company be allowed to transfer its assets at will? In a different context, a recent case like this is that involving the taxman and Nokia’s India operations. In that case, while the taxman had slapped a tax notice on the India operations, the firm made a large dividend payout to its Finnish parent; and, as part of a global deal with Microsoft, the India factory was to be transferred to Microsoft. With the taxman left with no assets to attach were he to win the case, the Microsoft deal was cleared by the Delhi High Court only subject to a Nokia Finland guarantee that, were Nokia India to lose the case, it would make good the tax payment. Given how case law evolves with each subsequent court judgment, the last word on the subject of creditors’ rights has clearly not been heard.