Equivalent citations: AIR 2019 SUPREME COURT 1196, AIR 2019 SC( CRI) 545, (2019) 3 SCALE 428, (2019) 1 CURCC 292, (2019) 4 ANDHLD 58, AIRONLINE 2019 SC 92
Author: R.F. Nariman
Bench: Vineet Saran, R.F. Nariman
Introduction
The case between Ericsson and Reliance Communications (RCom) revolves around a Managed Service Agreement signed in 2013, where Ericsson agreed to provide managed services for RCom’s network. Despite raising invoices for their services, Ericsson received no payment from RCom. This led Ericsson to issue notices under the Insolvency and Bankruptcy Code in 2017, demanding payment of INR 9.78 crore. After failed attempts at settlement, Ericsson terminated the agreement and filed applications under Section 9 of the Insolvency Code as operational creditors.
The National Company Law Tribunal (NCLT) admitted the petitions and appointed Interim Resolution Professionals to handle the corporate insolvency resolution process. However, following negotiations, a settlement agreement was reached for payment of INR 550 crore by RCom to Ericsson. Despite the settlement, RCom failed to make timely payments, leading to a series of contempt petitions by Ericsson. The case highlights the challenges of enforcing settlements in insolvency cases and the complexities of corporate debt resolution processes.
Facts
On 25.01.2013, Ericsson and RCom entered into a Managed Service Agreement where Ericsson would provide managed services for RCom’s network. Despite raising invoices, Ericsson received no payment and issued three notices under the Insolvency and Bankruptcy Code, 2016, demanding INR 9.78 crore from the Reliance Companies. The companies replied, citing inconsistent performance by Ericsson. Discussions for settlement failed, leading Ericsson to terminate the agreement and file applications under Section 9 of the Code as operational creditors.
The NCLT admitted the petitions and appointed Interim Resolution Professionals. Appeals were filed against this, but the NCLAT stayed the orders and recorded a settlement agreement for INR 550 crore to be paid within 120 days. However, disputes arose over the terms of payment, leading to contempt petitions by Ericsson. Despite several extensions requested by RCom, the court was not inclined to grant further extensions. Ericsson continued to pursue payment, leading to further contempt petitions and legal actions.
Issues Raised
- Validity of the termination of the agreement by Ericsson and its implications on the outstanding payment.
- . Adherence to the settlement agreement of INR 550 crore by both parties and the controversy surrounding the undertakings filed by the Chairmen of the Reliance Companies.
- The request for extension of time for payment by the Reliance Companies and the court’s response, including the dismissal of the second application for extension.
- Compliance with court orders and undertakings, specifically regarding the payment schedule and conditions set forth in the settlement agreement.
- The role of the Insolvency and Bankruptcy Code, 2016, in the proceedings and its impact on the resolution of the dispute between Ericsson and the Reliance Companies.
Contention
By Plaintiff
Ericsson’s main contention is that despite entering into a Managed Service Agreement with RCom and providing services, RCom failed to make payments for the services rendered. Despite issuing several notices and attempting to reach a settlement, RCom did not fulfill its payment obligations, leading to the termination of the agreement by Ericsson. Ericsson argues that it has a valid claim for the outstanding amount and has followed the due process under the Insolvency and Bankruptcy Code, 2016 by filing applications under Section 9 as operational creditors. The National Company Law Tribunal (NCLT) admitted the petitions, and Ericsson has been pursuing the payment through legal means.
Defendant’s Contention:
The three Reliance Companies, on the other hand, contend that Ericsson’s performance was inconsistent, leading to disputes regarding the payment for services. They argue that discussions were held to resolve the payment issues, and an understanding was reached for making the outstanding payments. However, they claim that Ericsson’s termination of the agreement and subsequent actions under the Insolvency Code were premature and done in bad faith. They further contend that they have made efforts to settle the dispute and have deposited a significant amount with the court, demonstrating their willingness to resolve the matter. They argue that the contempt petitions filed by Ericsson are unwarranted and that they should be allowed to complete the sale of assets to fulfill their payment obligations.
RATIONALE
Issue 1
- Validity of termination: Ericsson terminated the agreement with RCom citing non-payment, but RCom argued that Ericsson’s performance was inconsistent, raising questions about the validity of the termination.
Issue 2
- Adherence to settlement terms: The parties reached a settlement for INR 550 crore, but the undertakings by the Reliance Companies to pay upon sale of assets created a dispute over the terms of settlement.
Issue 3
- Contempt of court: Ericsson filed multiple contempt petitions against the Reliance Companies for failing to adhere to the court’s orders regarding payment, raising issues of compliance and legal consequences
Issue 4
- Extension of time for payment: The Reliance Companies requested extensions for payment, citing issues with the sale of other spectrum. The court’s response to these requests raised questions about the parties’ obligations and the court’s discretion in granting extensions.
Judgement
The court noted the history of the case, including the agreement between Ericsson and RCom, the issuance of notices under the Insolvency Code, the termination of the agreement by Ericsson, and the subsequent legal proceedings. The court observed that despite various understandings and agreements for settlement, the Reliance Companies failed to make the required payments to Ericsson, leading to contempt petitions and legal actions.
The court emphasized the importance of honoring commitments and complying with court orders. It noted that the undertakings given by the Chairmen of the Companies were not fulfilled as per the court’s order, leading to further complications and legal proceedings.
Considering the facts and circumstances of the case, the court directed the Reliance Companies to make the necessary payments as per the settlement agreements and court orders. It warned that failure to comply would result in serious consequences, including contempt proceedings. The court stressed the need for all parties to act in good faith and uphold the integrity of the legal process.
Defects of law
- Lack of clarity in terms of payment: The undertakings given by the Chairmen of the Companies stated that the sum of INR 550 crore would be paid “upon sale of assets of the company,” which was not in line with the court’s order for payment by a specific date.
- Failure to adhere to timelines: Despite multiple extensions requested by the Reliance Companies, the court was not inclined to grant further extensions, indicating a lack of adherence to the court’s directives.
- Mismanagement of contempt petitions: The filing of multiple contempt petitions by Ericsson indicates a failure to resolve the dispute effectively, leading to a prolonged legal battle.
- Lack of coordination: The actions of the Reliance Companies, such as applying for extensions and subsequently withdrawing them, suggest a lack of coordination and strategy in dealing with the matter.
- Financial implications: The delay in payment and the subsequent legal actions have resulted in additional financial burden, including interest at the rate of 12% per annum, for the Reliance Companies.
Inference
The case between Ericsson and RCom highlights the challenges of enforcing payment agreements and the complexities of insolvency proceedings. Despite entering into a settlement agreement for INR 550 crore, RCom failed to adhere to the agreed timeline for payment. The dispute escalated with Ericsson filing contempt petitions, citing non-compliance. RCom’s attempts for extension were rejected, and the court reiterated the payment deadline. The case underscores the importance of honoring contractual obligations and the legal consequences of non-compliance. It also demonstrates the courts’ commitment to upholding agreements and ensuring timely resolution of disputes in insolvency cases.
References
- Author: R.F Namriman