NCLT admits corporate insolvency proceeding against Oyo subsidiary

"We are surprised to hear that the Hon’ble NCLT has admitted a petition against OHHPL a subsidiary of OYO for Rs 16 lakh in a contractual dispute, which dispute is not even with this subsidiary. We have filed an appeal. The matter is sub-judice and we would refrain from commenting further on the merits of the matter at this stage. We have strong faith and belief in our judicial system," the company said in a statement.

Oyo acquired Weddingz, an online marketplace for wedding venues and vendors, in a cash and stock deal in 2018. The company was founded in 2015 by an Indian Institute of Technology-Delhi and Wharton School alumnus Sandeep Lodha.

While the hospitality sector, hit badly by the coronavirus pandemic and lockdown, has seen some green shoots emerge over the last few months, the wedding business continues to reel under COVID-19 restrictions.

In a tweet, Ritesh Agarwal, founder of Oyo, which runs the company under the parent firm Oravel Stays, said the hospitality startup had moved the NCLAT. He also said the company had already paid the claimant “under protest”, which means without agreeing on the issue.

In saying that Oyo had paid the claimant "under protest", Agarwal could be signalling to NCLT or other observers that there isn’t a potential for an insolvency case, say experts.

Insolvency cases are usually filed when the debtor goes bankrupt and is not in a position to clear debts. While the company did not respond to Moneycontrol's query, sources said the payment was made after March 30 when NCLT issued the order.

According to sources, the plea was filed by a Gurgaon-based hotelier, Rakesh Yadav. The order, a copy of which was seen by Moneycontrol, describes the applicant as the owner of a hotel earlier known as Yellow White Residency.

"The creditor has stated that vide the management services agreement dated November 16, 2018, the respondent company was granted an exclusive license to operate and maintain the hotel under the brand Oyo," the order said.

The applicant said the respondent was regular with the payments till June 2019 but started defaulting after that. From July to November, the cumulative operational debt stood at Rs 16,02,000.

Legally speaking

According to legal experts, a creditor who is owed more than Rs 1 crore can take a company to NCLT for insolvency proceedings in India. The limit was raised to Rs 1 crore in March 2020 from Rs 1 lakh.

If the tribunal is prima facie convinced, it initiates the proceedings with the appointment of an IRP, which in this case is Shah.

IRP then issues a public notice inviting all creditors of the company, financial or operational, to submit their claims. It makes a list of all claims that are admissible.

Before taking the proceedings forward, IRP and the court will give an opportunity to Oyo to settle with the creditors. "Oyo will need to arrive at a settlement with 90 percent of its creditors by value," Karan Kalra, founder of law firm Bombay Law Chambers, told Moneycontrol.

If it is unable to do so, the company will go down the path of insolvency resolution and bidders will be invited to submit their bid to buy the company.

If the company is not bought, it will be liquidated, stripped of its assets. The creditors will be paid off with whatever money comes out of the liquidation process.

"If the payment was made after NCLT came up with its order, it will not lead to any settlement. As per the law, once the insolvency proceeding is admitted, claims of all other creditors are invited to be dealt with. The only way to stall this now is by appealing to NCLAT which they seem to have done,” Kalra said.