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Edelweiss Asset Reconstruction, Represented by its Authorized Signatory, Mumbai V/S Empee Hotels Limited, Represented by its Executive Director, Chennai & Another

    Application No. 445 of 2020 & O.A. No. 1015 of 2019 in C.S. No. 654 of 2019

    Decided On, 19 February 2020

    At, High Court of Judicature at Madras

    By, THE HONORABLE JUSTICE: G. JAYACHANDRAN

    For the Petitioner: S. Ravi, for S. Indumathi Ravi, R1, A.V. Arun, for K. Ganesan, Advocates, R2, Set Exparte



Judgment Text


1. For the sake of convenience, the applicant is referred as the first defendant and the respondents 1 and 2 are referred as the plaintiff and 2nd defendant respectively.

2. The plaintiff is a private limited company having its registered office at Chennai. The first defendant is an asset reconstruction company and the second defendant is a financial bank/ escrow agent. The plaintiff availed loans from several banks for its business. The banks which extended loans to the plaintiff company assigned the loans availed by the plaintiff to the first defendant for restructuring of all financial assistance extended by various banks under single umbrella. The first defendant sanctioned restructuring of financial assistance by its sanction advice dated 30/11/2016. As per the terms and conditions mentioned in Annexures I and II to the letter dated 30/11/2016, the first defendant taken over the plaintiff’s total loan of Rs.230.21 crores from various banks (except Syndicate Bank) repayable with interest at the rate of 7.75% per annum over a period of 8 years with effect from 01/04/2015. The loan amount Rs.27.30 crores taken over from Syndicate Bank will be repaid with interest at the rate of 7.75% per annum over a period of 8 years with effect from 28/08/2016. As per the conditions mentioned in the restructuring letter, the plaintiff has to repay the amounts on the respective due date and in case of any default, default interest at the rate of 15% per annum is payable and make good the short fall within the curing period of 60 days. The plaintiff agreed to pledge 51% of its equity share in favour of the first defendant throughout the period of restructuring.

3. Besides, an escrow mechanism was put in place, wherein the Tripartite Escrow Agreement was entered at Chennai between the plaintiff, first defendant and the second defendant/ escrow agent on 23/11/2017. As per the said escrow agreement, the plaintiff agreed to collect and receive all its receivables, cash transactions etc., which includes all monies accruing to the plaintiff shall be deposited with the 2nd defendant in the current account No.50200019576994 and transfer the funds from this account to Escrow Account No.50200028040101. As per the agreement, 10% of the collections received in the current account No.50200019576994 between 1st to 15th of every month would be transferred and kept in escrow Current Account No.50200028040101 on a day to day basis and the entire amount lying in the Escrow Current Account shall be paid by the 2nd defendant to the 1st defendant on the 16th of the month by RTGS. Likewise, another 10% of the total collections received in the escrow account between 15th and the last working day of the every month would be transferred to keep the Escrow Flexi Deposit Account along with the interest due shall be paid by the 2nd defendant to the first defendant on the last day of the month by RTGS. From total amount accrued in the Escrow Account No. 50200028040101, 90% would go to repayment of loan and remaining 10% would be paid over to syndicate bank.

4. As per the above arrangements in the Tripartite Escrow Agreement, the Plaintiff has been remitting entire collections through Escrow account. The receiveables for the plaintiff depend upon the collection in the hotel and it is based on occupancy which in turn based on facility offered in the hotel. Pursuant to the Hon'ble Supreme Court direction dated 15/12/2016, the State Government cancelled the Bar license to the hotels on the highways. The plaintiff hotel which is located on the extended stretch of the highways with the limits of Corporation lost its business due to the said prohibition, its occupancy rate drastically come down. The plaintiff therefore could not honor its quarterly commitment during the said period. Under the said circumstance, the first defendant increased the collection percentage from 10% to 20% from 05/04/2018. The plaintiff company got amalgamated with Appollo Alchobev Limited with effect from 01/04/2017 and the National Company Law Tribunal (NCLT) orders sanctioning the scheme was received on 22/02/2018. After amalgamation, the equity share given as security to the first defendant fall from 51% to 34%. The plaintiff mortgaged 4 flats in favour of the first defendant on 18/06/2019. However, the first defendant increased the percentage of collections from 20% to 25% on the collections. The plaintiff agreed the increase of the percentage of collection from 20 to 25, though it was an uphill task for the plaintiff to honour. However, since the ban of bar on highways hotels was de-notified later, the occupancy rate improved and the plaintiff continued to honour the payment of 25% of its collection to the first defendant without fail. When that being so, the first defendant addressed a letter dated to the second defendant to increase the percentage of collections from 25% to 50%. The plaintiff has to pay the tax dues, salaries, input cost on food and other overhead charges. Such a steep increase would affect the day to day operation of the plaintiff business and also will have cascading effect in running the business. Hence, by letter dated 14/10/2019 the plaintiff explained its position to the first defendant to continue the collection percentage as per the escrow agreement or atleast to restrict to 25%. Instead of considering the request, the first defendant has cancelled the restructuring financial assistance to the plaintiff by its letter dated 11/10/2019.

5. The plaintiff claiming that, they were prompt in repayment and continues to remit 25% of the total collections through the escrow arrangement as agreed. While so, the increase in collection percentage to 50% and cancellation of the restructuring the financial assistance is in violation of the agreement, hence illegal, C.S. 654/2019 is filed for declaration that the cancellation of restructure of financial assistance agreement dated 30/11/2016 by the first defendant vide its letter dated 11/10/2019 is illegal, arbitrary and not binding on the plaintiff and consequently, sought for mandatory injunction directing the defendants to restore the collection of 10% as cut back from the escrow account as per the tripartite escrow agreement dated 23/11/2017 executed between the plaintiff and the defendants.

6. Pending disposal of the suit, the plaintiff has filed the present O.A.No.1045 of 2019, seeking interim injunction restraining the first defendant anyway acting in furtherance of the letter dated 11/10/2019 against the plaintiff for the financial assistance extended to the plaintiff as per the tripartite Escrow Agreement dated 23/11/2017.

7. Considering the facts above narrated as found in the pleadings, this Court granted interim order of injunction on 09/12/2019 for a limited period. The first defendant filed A.No.445 of 2020 to vacate the injunction. In the affidavit filed in support of the vacate injunction petition, the first defendant has stated that, the plaintiff company which availed loan from Indian Overseas Bank, Indian Bank, Allahabad Bank, Bank of India, Union Bank of India and Syndicate Bank for its Five Star Hotel Project defaulted in repayment hence declared as Non Performing Asset (NPA). Subsequently, under the Securitisation Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), the plaintiff’s debt were assigned to the first defendant by those banks on various dates. At request of the plaintiff, the repayment schedule of the debt was restructured and the agreement came into effect from 01/04/2015. The plaintiff agreed to pay the entire restructured amount by 31/03/2023 as indicated in Annexure I of the agreement. The escrow arrangement was entered involving the plaintiff, first and second defendants through the tripartite agreement, to the effect that the dues under the restructured payment must be ensured by the plaintiff from the collections/receivables of the plaintiff hotel remitted in the escrow account maintained in the second defendant bank. Out of the said remittance, 90% has to be remitted to the first defendant for the loan due payable towards loan assigned by the banks other than syndicate bank and 10% towards the loan assigned by the syndicate bank. If there is any short fall to the quarterly repayment amount as agreed under restructuring letter, the plaintiff shall arrange for effecting additional payment to meet the committed payment. As per the Escrow agreement dated 23/11/2017, the first defendant has the right to increase the collection percentage and in exercise of the said option, the collection percentage from 10% to 20% was increased on 05/04/2018.

8. When the plaintiff informed about its intention of the merger of plaintiff company (Empee Hotels Limited) and Appollo Akobev Limited (AAL) to infuse funds, the first defendant offered its No Object Certificate to the proposed arrangement on 29/03/2017 subject to the following terms and conditions:-

1) Pledge of 51% equity shares of the company shall be done post merger of AAL with EHL. As such, in case there will be fresh issue of shares, promoters shall be required to pledge fresh shares in favour of EARC in roder to make the effective pledge at 51%. All the shares of the company shall be converted to demat forms.

2) All the sale proceeds from sale of apartments shall be routed through Escrow account opened by eHL in line with restructuring entered into with EARC for EHL's pre-merger debt.

3) Lenders of AAL – Transferor Company, if any secured or unsecured, shall not have any charge on the merged assets of EHL-Transferee company.

4) Post merger, EHL shall take consent from eARC for creating any fresh charge on any asset of post merged entity.

5) EHL shall ensure all the statutory and regulatory compliances.'

9. The scheme of merger was approved by the National Company Law Tribunal (NCLT) on 22/02/2018. Post merger, the percentage of equity share pledged with the first defendant reduced to 34%. The plaintiff did not pledge fresh shares. The plaintiff delayed the sale of apartments. Even after lapse of 3 months, the plaintiff neither sold the apartments nor created charge. After much persuasion, they sold one apartment and remitted the sale proceeds and created mortgage of the remaining apartments after nearly 6 months. In the said circumstances, on 18/06/2019, the first defendant increased the collection percentage from 25% to 50%, to meet the quarterly target fixed under the rescheduled agreement. After waiting for more than a year, cancelled the restructuring of financial assistance on 11/10/2019.

10. It is stated in the said affidavit, that the plaintiff is due to pay nearly Rs.9 crores for the quarter ending December 2019 as per the restructuring agreement. In view of the interim order, the plaintiff has not taken any steps to remit the amount due to be paid in December, 2019. Even if the collection percentage is increased to 50%, the plaintiff will not be able to pay the quarterly dues as per the agreement since, only Rs.3.88 crores available in the escrow account.

11. The plaintiff is a private limited company running hotel business. The first defendant is a securitization company. The second defendant is the escrow agent. They all have entered into a tripartite agreement with escrow arrangement on 23/11/2017 regarding repayment schedule extending for a period of 8 years by restructuring the financial assistance extended by first defendant to the plaintiff. The plaintiff has not paid the dues as per the schedule many times, however manage to pay the dues substantially during the curing period. Likewise, after amalgamation the percentage of the equity share pledged as security fall from 51% to 34%. Though the plaintiff promised to increase the pledge of its equity share to 51%, till date the share percentage not increased. When the vacate injunction came up for arguments on 10/01/2020, the learned counsel for the plaintiff submitted that they have mobilised fund to pay the December Quarter dues and the shortfall will be paid within the cooling period and also report about the steps taken to increase the percentage of shares pledge from 34% to 51%. Hence, the matter was adjourned to 06/02/2020 and further adjourned to 11/02/2020.

12. In the counter filed in response to the vacate injunction application, the plaintiff has stated that, as per the repayment schedule for the quarter starting from 01/10/2019 to 31/12/2019, the plaintiff has to pay Rs 9 crores, which has been achieved within the end of January, 2020. As regards, the payment for the quarter ending on 31/03/2020, the plaintiff has planned its repayment schedule and confident to pay the entire Rs.18.33 crores within the time prescribed. The plaintiff is planning to infuse funds and also make arrangements to pledge 51% of the equity shares for which the cancellation of the restructured financial assistance has to be restored. On 05/02/2020, the plaintiff filed additional affidavit, wherein it is stated that, so far they have paid Rs.97,65,96,732/90 towards the loan dues. Upto quarter ending December 2019, the plaintiff has fulfilled its obligations and there is no balance payable. For the quarter ending March, 2020 the plaintiff has projected payment plans as below:-

Projected collections from operations

Rs,8,00,00,000.00

Funds from operations @ 25% deduction (February & March)

Rs.4,00,00,000.00

Proceeds from sale of flats @ Bangalore

Rs.3,96,00,000.00

Closure of Bank Guarantee

Rs.50,00,000.00

Additional Funds from operations by postponing expenditures

Rs.3,00,00,000.00

Total projected payment

Rs.11,46,00,000.00


13. In the additional counter, the plaintiff has stated that they are negotiating to monitise the mortgage apartments. They are also through negotiations with the investors for infusion of funds to settle the dues.

14. It is to be pointed out that, under the tripartite escrow agreement dated 23/11/2017 the plaintiff has ensured that it will deposit its receivables/ all its operational revenues from various collection sources in Current Account No.50200019576694 maintained with Escrow Agent (2nd defendant). From out of those deposit, every 16th and last day of the month, 10% of the total collection will be transferred to Escrow Current Account No.50200028040101 to discharge the outstanding dues of the borrower (plaintiff). EARC (first defendant) reserve the right to increase the collection percentage in the Current A/c No. 50200019576694 (clause 3 ). Based on this term, the first defendant has increased the percentage from 10% to 20% then to 25% and now to 50%. The first defendant has reasons for the said increase. The plaintiff has more often failed to honour its commitment to pay the quarterly dues as per the schedule and had resorted to the cure period clause. Since the shortfall from the escrow account was huge, the percentage has been increased and the plaintiff has agreed to the increase from 10% to 20% and from 20% to 25%. Having conceded the right to increase the percentage, the said right conferred to the first defendant cannot be prohibited if such exercise of power is legally justifiable. In fact, the plaintiff through its letter dated 22/10/2019 to the first defendant had sought to reconsider the increase in percentage and instruct the second defendant to deduct only 25% from their cash flow so that they will be able to conduct the business without any disruption. Plaintiff has offered to retain recoveries at 25% and restore the restructuring agreement.

15. As per the terms and conditions of the sanction letter for restructure, the tripartite agreement and the revised restructuring of financial assistance between the parties, 10% of the monthly receiveable of the plaintiff has to be remitted in the escrow account, which is the minimum guarantee for the first defendant towards the quarterly dues payable by the plaintiff. If there is any shortfall, it has to be paid by the plaintiff from other sources. In case of default, 60 days time is given as cure period and for the defaulted amount enhanced interest at the rate of 15% is payable. If the default continues beyond the cure period of 60 days, the first defendant has the right to revoke the Non Disclosure Agreement (NDA).

16. Regarding pledge of shares, under clause 5 of the restructure agreement the plaintiff has agreed to maintain an effective pledge of 51% of its equity shares with the first defendant. Admittedly post amalgamation only 34% of the shares under pledge with plaintiff.

17. In the said circumstances, the first defendant has issued the cancellation letter dated 11/10/2019 which is impugned in the suit and subject matter of the interim injunction order. This letter of the first defendant is self explanatory and reasons for cancelling the mentioned. The plaintiff has written back to the first defendant to reconsider their decision and that was also turned down by the first defendant vide its letter dated 24/10/2019 which reads as below:-

1. We refer to your letters dated October 14, 2019 and October 22, 2019 in response to our letter no.EdelARC/1993/2019-20 dated October 11, 2019 with respect to cancellation of Restructuring of Financial assistanes to Empee Hotels Ltd.

2. In this regard, we would like to bring to your attention that Edelweiss Asset Reconstruction Company Ltd., acting in its capacity as Trustee of EARC Trust SC 127, SC 133, SC 179, SC 203, SC 210 and SC 232 ('EARC') has extended its sincere support and cooperation in resolving the stressed account of Empee Hotels Ltd., ('EHL' or 'Company') post assignment of debts by the Assignor Banks. Please take note of the following instances:

a) EARC had initially agreed for restructuring of the financial assistance vide its letter No.EdelARC/1336/2016-17 dated July 13, 2016 (1st restructuring). However, based on request of the Company which expressed difficulty in meeting the liquidity events of Rs.50 crore in FY 2019 and FY2020, EARC agreed to consider the request and the dues were rescheduled accordingly and revised rstructuring letter No.EdeARC/2893/2016-2017 dated November 30, 2016 was issued (2nd restructuring).

b) EARC agreed to reschedule the restructuring 3rd time vide letter No.EdelARC/2385/2018-19 dated October 26, 2018. This reschedulement was asked by EHL citing the reason of ban on selling of liquor by the Supreme Court during the period between April-August 2017.

c) As per the terms of revised restructuring, the Company was required to create a mortgage on the additional properties within 60 days from the date of the revised restructuring letter dated October 26, 2018. Though the security was not created within stipulated time of 60 days, EARC condoned the delay and allowed extension till March 31, 2019 for security creation. However, EHL again failed to adhere to the extended timeline also and on EHL's request EARC granted extension for 2nd time till June 30, 2019.

d) EHL has been making delayed payment throughout the past period of restructuring. EHL has been misusing the cure period given by EARC quite frequently and EARC has supported the company to pay the restructuring dues even with delay

As can be observed from above, EARC has been more than supportive in company's effort in revival. In the above backdrop, your allegation of non-cooperation by us is baseless and hence, denied by us.

3. We would like again to re-iterate our stand on default on pledge of shares and we state that the non pledge of equity shares is a serious violation of restructuring terms. The fact that the noncompliance was persisting for more than 18 months shows that there was an intentional delay on the part of EHL in the matter. Since EHL has accepted the restructing terms, it is the prime responsibility of EHL to adhere to terms of restructuring without any reminders from EARC. Hence the plea of EHL that it is an unintentional oversight and a simple procedural lapse is not acceptable. Please be mindful of the fact that all the terms and conditions including pledge of 51% equity shares are equally important and critical conditions that needs to be strictly adhered to at all times throughout the restructuring. The event of default is not limited to repayment obligations as per the restructuring.

4. We hereby advise that EARC has every riht to enforce Event of Default and the said right can't be disputed by EHL since the restructuring terms has already been accepted by EHL. Since the restructuring has already been cancelled by EARC, we state that you are liable to repay the entire existing liability due and payable to EARC immediately with no further delay.

5. Since the entire liability is due and payable by EHL, EARC has also exercised its right under escrow agreement dated November 23, 2017 and increased the cut back from 25% to 50%. Please note that though EARC is within its right to recover 100% of the recovery through escrow account, EARC has restructed the cut back to only 50% considering that the hotel is operating. When there is huge public money at stake involving in excess of Rs.250 crore, your appeal of not recovering the same in the pretext of making the hotel operating is not acceptable. As a promoter of EHL, it is your primary responsibility to infuse funds to clear the entire dues of EARC and to also infuse funds for operating the hotel.

6. This letter is issued without prejudice to the rights of EARC to recover the dues of EHL and EARC shall continue to pursue/proceed with all legla actions for recovery of dues.

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' 18. In the above context, the additional affidavit filed by the plaintiff on 05/02/2020 stating out the projection of payment mode for the quarter ending March 2020 (extracted earlier) gains significance. The plaintiff in the said additional affidavit at paragraph No.4 has submitted that, 'we are in process of raising structured finance and in this connection we have appointed a financial consultancy vis., Silver Bear Capital Inc, Oliaji Trade Centre - 1st Floor, Victoria, Mahe, Seychelles and the same was evinced interest in raising finance to settle the entire loan amount with the applicant herein. In the process, we have executed mutual non disclosure agreement in favour of the said Silver Bear Capital Inc., and sent to them. This exercise will be completed within a span of 4 to 5 months.' 19. From the terms of agreement and from the conduct of the plaintiff, this Court finds that the first defendant is fully justified in increasing the percentage of deduction from 25% to 50% and the plaintiff can have no grievances over it, having chronically failed to honour the schedule of payment. As far as the cancellation of restructure assistance, since the plaintiff has given its projected payment plan for the quarter ending March 2020, few weeks from now, this Court is of the view, the interim order of injunction which deserve to be vacated on merits shall stand deferred till 31/03/2020. In case, the plaintiff failed to pay the quarterly due of March 2020 within the period without resorting to cure period, the injunction shall get vacated automatically. 20. If the plaintiff comply the commitment as stated in the additional affidavit and pay the due for the March quarter 2020 by the end of March 2020, this order of vacating the interim injunction shall be kept in abeyance for a further period of three months ending June 2020, to ascertain whether the plaintiff who is liable to pay a sum of Rs.9 crores under schedule of repayment for trust other than Syndicate Bank and Rs.1 crore under the schedule of repayment towards the Syndicate Bank a total sum of Rs.10 crores pay and also arrange for pledging of its equity share to an extent of 51%. 21. If the plaintiff fails to comply any of the above conditions, the order of vacating the injunction shall come into force forthwith. 22. With the above directions, A.No.445 of 2020 and O.A.No.1015 of 2019 in C.S.No.654 of 2019 are disposed of.
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