The Supreme Court Wednesday held Reliance Communications (RCom) chairman Anil Ambani guilty of contempt for not paying Rs 550 crore dues owed to Swedish telecom giant Ericsson. Asking Ambani to pay Rs 453 crore to Ericsson within four weeks, a bench of justices R F Nariman and Vineet Saharan warned that he would face three months jail if its orders were not followed. The verdict came after Ericsson dragged Ambani to court after RCom failed to clear its dues of Rs 550 crore despite having given an undertaking to pay the amount.
So what is Ericsson’s case against RCom?
In 2014, Ericsson had signed a deal with RCom to operate its nationwide telecom network. After RCom, which has a debt of more than Rs 47,000 crore, failed to pay Ericsson, it moved an insolvency petition in the National Company Law Tribunal (NCLT). The petition to recover pending dues of Rs 1,150 crore was admitted in May last year.
However, RCom amicably settled the dispute by offering Rs 550 crore, which was to be paid by September 30, 2018. When RCom failed to pay this as well, Ericsson approached the Supreme Court in September. RCom was given a deadline of December 15, 2018, to pay its dues. When it failed to do so, Ericsson approached the court again on January 4 this year for initiation of contempt proceedings for the second time. The Supreme Court had warned that failure to comply with its orders would attract an interest of 12 per cent per annum.
During the hearing, however, senior advocates Kapil Sibal and Mukul Rohatgi, appearing for RCom, had asked the Supreme Court to accept Rs 118 crore towards outstanding dues to Ericsson India to establish its bonafide. The counsel appearing for Ericsson, however, refused to accept the amount and said the entire outstanding sum of Rs 550 crore should be deposited. The apex court bench, headed by Justice R F Nariman, then directed RCom to deposit a demand draft of Rs 118 crore in the registry.
Why RCom shut operations in 2017
Reliance Communications decided to shut down operations in 2017 while the entire telecom sector was stressed due to the entry of Reliance Jio, Mukesh Ambani’s company. The telecom sector was in a state of upheaval because of Jio’s cheap tariff charges and many players, including RCom, were unable to sustain operations.
The Insolvency and Bankruptcy Code (IBC) was introduced by the NDA government in 2016, but lenders did not take RCom to the insolvency court until much later. Things had however changed sometime in the middle of 2017 as it became evident that RCom was having trouble in repaying their debt.
Despite a series of markdowns by credit agencies on RCom’s ability to repay their debts, their lenders continued to restructure some of the debt until 2017.
Why did Ericsson take RCom to the insolvency court
Ericsson, one of RCom’s vendors, is owed Rs 1,150 crore in dues for the telecom network equipment they had supplied. The Swedish telecom giant took RCom to insolvency court when they couldn’t recover the money.
Now that RCom is in Insolvency, according to the IBC, there is a waterfall mechanism which is followed for financial dispute resolution. Under this, a secured financial creditor gets paid first. If any money is left, it then goes to the unsecured financial creditors, and the remaining to operational creditors.
Ericsson is an operational creditor. But in this case, since Ericsson moved the Supreme Court first, their claim was admitted.