A bitter ownership battle has erupted in McDowell Holdings, a company facing bankruptcy proceedings, with a bunch of minority shareholders accusing former promoter Vijay Mallya of attempting to wrest back control through proxy companies and by exploiting India’s bankruptcy laws.
“There seems to be a clear conspiracy involving Vijay Mallya and a few others to get back control of McDowell Holdings through misuse of the National Company Law Tribunal (the court that deals with bankruptcy cases),” said Porinju Veliyath, whose firm Equity Intelligence India owns an almost 5 percent stake in the company.
“This is actually Rs 1,000 crore of liquid assets that belong to 47,000 shareholders. We need justice,” Veliyath, a prominent stock market investor, told Moneycontrol.
Matters came to a head on September 19, when McDowell Holdings informed the stock exchanges that creditors had approved the debt resolution plan of a company called Phoenix Theme Infra Projects. McDowell Holdings was taken to the bankruptcy court in April 2022 by financial creditor Sun Star Hotels and Estates Private Ltd. after defaulting on a sum of Rs 16.8 crore.
When contacted, Mallya said he has never heard of Sun Star Hotels and denied any connection with the company, directly or indirectly.
“I left India in 2016 and have had no connection with McDowell Holdings since then. As such, I know nothing about this purported transaction,” Mallya, a former liquor baron who once ran India’s biggest drinks company, told Moneycontrol from London.
“I am no longer a shareholder of McDowell Holdings and I do not even know who the directors are. I have no contact with the management either. Those making such allegations should verify their facts first,” said Mallya, who is fighting extradition to India over Rs 9,000 crore he owes a clutch of lenders.
On their part, the minority shareholders of McDowell allege that the debt resolution is part of a larger conspiracy by Mallya to gain control of the company through Sun Star Hotels. The company, minority investors allege, is part of the Balaji Distilleries group that has long-time business links with Mallya’s companies.
Some of the minority shareholders, who together own about 15 percent stake in the company, told Moneycontrol that they offered to pay back the money to the financial creditor by submitting copies of the demand draft in the National Company Law Appellate Tribunal (NCLAT). Yet, the creditor wouldn’t take the money, they said. Instead, it pushed for the sale under the Insolvency and Bankruptcy Code (IBC) process.
“Under Section 12 A of the IBC Act, the creditor can withdraw the case if resolution happens outside the court. But in this case, Sun Star Hotels didn’t want to take the money and withdraw the case,” said another minority shareholder, who didn’t want to be identified.
“It is arguably the first time in India’s bankruptcy history that a creditor is refusing to accept money,” said another investor.
The acrimonious battle that has pitted shareholders against the creditor puts the spotlight again on the efficacy of India’s bankruptcy law as a tool to resolve the problem of bad debts. The matter, which has reached the Supreme Court, could potentially have a bearing on how bankruptcy cases are steered to an effective resolution.
McDowell Holdings is the demerged investment arm of Mallya’s UB Group. The value of the debt resolution plan submitted by Phoenix Theme Infra Projects is only a fraction of the holdings of the UB Group, according to the minority shareholders.
A spokesman for Sun Star Hotels said the claims made by a small section of shareholders are completely false and baseless.
“The entire issue is sub-judice and it is improper for us to be making comments when matters are being actively argued in court,” the spokesman said.
The spokesman said it is in fact the small group of shareholders making such allegations who are acting at the behest of Mallya. The necessary details in that regard showing their close connections have already been filed before the NCLAT and are pending adjudication, according to him.
Bajaj Distilleries did not comment.
The Chennai connection
All three—Sun Star Hotels, Balaji Distilleries and Phoenix—are Chennai-based companies, according to data available with Zaubacorp and Tofler.
Balaji Distilleries was incorporated on December 15, 1983, with an authorised share capital of Rs 224.9 crore and a paid-up capital is Rs 143.01 crore. The directors of the company, which once made Kingfisher and Kalyani Black beer for UB, among other brands, are Raghuram Ramachandran, Siddareddy Venkata Sesha Reddy, and Chandrasekhara Reddy Vinta.
Sun Star Hotels (referred to as Sunstar Hotels and Estates Private Limited in the records of Zaubacorp and Tofler) is an unlisted company incorporated on February 17, 2006. It is classified as a private limited company and is located in Chennai with an authorised share capital of Rs 108 crore and paid-up capital of Rs 101.82 crore. The company has two directors – Dasaradharami Reddy Siddavarapu and Rangarajan Radesh.
Phoenix Theme Infra Projects was incorporated on November 12, 2018. The designated partners of Phoenix Theme Infra Projects are Renuka Kumar and Shamila Kohli.
McDowell’s minority shareholders
Besides Veliyath, the minority shareholders of McDowell Holdings include TJ Leelamma, Litty Thomas, Sheeja T, Acacia Partners LP, Acacia II Partners LP, Acacia Institutional Partners LP and Acacia Conservation Fund LP.
On April 27, 2022, the minority shareholders filed an appeal before the Chennai bench of the NCLAT, seeking to set aside the April 8 order of the NCLT admitting the insolvency of McDowell. They also appealed against the decision in the Supreme Court.
Despite the shadow of bankruptcy, McDowell Holdings is attractive to investors because of investments worth Rs 1,000 crore it holds in United Breweries. In other words, the owner of McDowell Holdings has the rights to shares worth Rs 1,000 crore in UB.
Mallya has only two shares in the widely held company, which has about 47,000 shareholders, according to exchange data.
How did the McDowell Holdings story evolve?
McDowell had borrowings of about Rs 15 crore from a company named Zuari Agro before the loan was taken over by Sun Star Hotels in 2021, according to people familiar with the matter. Sun Star Hotels also gave an additional Rs 1.5 crore loan to the company in 2022 at an interest rate of 18 percent for a period of one month.
When the company couldn’t pay back the sum, Sun Star Hotels dragged the company to the NCLT in April 2022.
What will happen now?
Minority shareholders now highlight Section 65 of the Insolvency and Bankruptcy Board of India Act, which pertains to fraudulent or malicious initiation of bankruptcy proceedings. Under the act, if any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent, the adjudicating authority can impose a penalty.
The ruling of the Supreme Court in this case will be critical. The next hearing is due on September 22, 2022.
Is IBC being misused?
There is a larger debate on whether the IBC process is misused by powerful businessmen to get back their companies at cheaper rates. Some recent developments show that the IBC process has loopholes that former promoters can abuse to gain control of the company, defeating the purpose of Section 29A, which was introduced in the IBC in 2017 to check attempts by recalcitrant promoters of insolvent companies to regain control of their company by forcing creditors to take massive haircuts.
The IDBI Bank-C Sivasankaran loan settlement is a case in point. A consortium of banks led by IDBI Bank took Siva Industries and Holdings to IBC court in July 2019. With no successful applicants for the company, the lenders ultimately accepted a one-time settlement. So, against a loan of about Rs 5,000 crore, Sivasankaran, who is the Aircel founder, paid only about Rs 500 crore to the banks.Danish Khan contributed to this article, by securing a comment from Vijay Mallya.