Tonse Gautham Pai’s insolvency action remains under stay

Tonse Gautham Pai’s personal-insolvency action remains pending under a Karnataka High Court interim stay. Bank of Baroda invoked Pai’s personal guarantee for $17,461,427.07 on February 9, 2023, plus unapplied interest from January 19, 2023, but the High Court stayed the action on July 12, 2024.

What is the current status of Pai’s insolvency action?

Pai’s insolvency action is pending, with an interim stay remaining the disclosed position. Bank of Baroda, Manipal Branch initiated the process of filing an application under Section 95 of the Insolvency and Bankruptcy Code, 2016, before the National Company Law Tribunal, Bangalore, to start an insolvency resolution process against Pai.

Section 95 is the provision used for an application to initiate insolvency resolution proceedings against a personal guarantor. The disclosure does not state that the National Company Law Tribunal admitted the application, appointed a resolution professional or made a finding on Pai’s liability. It identifies the action as an other material proceeding initiated against a promoter.

Pai filed a writ petition before the Karnataka High Court seeking two remedies: restraint on further National Company Law Tribunal action and quashing of the Section 95 application. The Karnataka High Court granted an interim stay on July 12, 2024. Bank of Baroda then filed an application dated August 20, 2024 seeking vacation of that interim order, and the prospectus describes the matter as currently pending.

The sequence distinguishes the February 2023 guarantee invocation from the July 2024 stay. The invocation letter made the payment demand, whereas the High Court order addressed the subsequent insolvency application. The disclosed record does not say that the stay cancelled the guarantee, settled the demand or determined the underlying debt.

How did Pai’s personal guarantee arise?

Pai’s personal guarantee arose from restructured credit facilities involving Primacy Industries Private Limited and its subsidiary, MVP Group International Inc. The guarantee was issued in favour of Bank of Baroda and covered due repayments of amounts owed by MVP to the bank. A personal guarantee is an undertaking by an individual to guarantee repayment of another borrower’s obligation.

Bank of Baroda invoked the personal guarantee by its February 9, 2023 invocation letter. The letter called on Pai to pay $17,461,427.07, described in the prospectus as an outstanding amount, plus unapplied interest commencing January 19, 2023. The source does not quantify the unapplied interest or provide a rupee equivalent for the United States dollar demand.

The $17,461,427.07 is therefore the amount demanded under the invocation letter, rather than an amount stated to have been awarded by a court or determined by the National Company Law Tribunal. The prospectus does not disclose a payment by Pai, a settlement with Bank of Baroda or a final decision on the creditor’s claim as of the Red Herring Prospectus date.

The disclosure also identifies MVP as the entity whose repayments were guaranteed. That matters because the personal-guarantee proceeding concerns Pai’s undertaking for MVP’s obligations, not a debt described as having been directly borrowed by Pai. The insolvency application nevertheless seeks a resolution process against Pai in his capacity as the personal guarantor.

How is Pai’s case connected with the Primacy Industries dispute?

Pai’s personal-guarantee action is connected with, but distinct from, a pending group-company dispute involving Primacy Industries, MVP and Bank of Baroda. Primacy Industries gave a corporate guarantee to Bank of Baroda’s New York Branch for MVP’s repayment obligations. A corporate guarantee is an obligation of the company, while Pai’s guarantee is disclosed separately as a personal undertaking.

As part of MVP’s credit-facility restructuring, MVP issued compulsorily convertible debentures, or CCDs, subscribed to by Bank of Baroda’s New York Branch on May 25, 2021. CCDs are debt instruments that must convert into equity under their terms. The prospectus does not state the value of the CCD subscription or whether the debentures had converted by the prospectus date.

A further part of the structure concerned Bank of Baroda, Manipal Branch. Under a restructuring of Primacy Industries’ facilities, $10.30 million was to be remitted by Primacy Industries to MVP. The Manipal Branch marked a lien on $12.20 million in Primacy Industries’ bank account and did not permit the remittance; a lien is a restriction or claim over funds held in an account.

After Bank of Baroda’s New York Branch invoked Primacy Industries’ corporate guarantee, the Manipal Branch debited the lien-marked funds. Primacy Industries filed a Karnataka High Court writ petition on March 28, 2023, seeking reversal of the $12.20 million remittance and challenging the debit and corporate-guarantee invocation. The High Court ordered status quo on March 30, 2023 on actions arising from that invocation, while the Manipal Branch remitted the $12.20 million on the same date.

The two matters differ in both legal mechanism and amount. Pai’s proceeding concerns a $17,461,427.07 personal-guarantee demand and a Section 95 insolvency application, while Primacy Industries’ proceeding concerns its corporate guarantee and the $12.20 million lien-marked funds. Both were described as pending, but the disclosed stays were issued on different dates: March 30, 2023 for the corporate-guarantee dispute and July 12, 2024 for Pai’s action.

What does the disclosure say about the wider litigation position?

The prospectus places Pai’s guarantee matter among other material proceedings against promoters, not among criminal, tax or regulatory proceedings. It says there were no pending actions by statutory or regulatory authorities against the promoters as of the Red Herring Prospectus date. It also says no disciplinary action or penalty had been imposed by the Securities and Exchange Board of India, or SEBI, or stock exchanges against the promoters during the five fiscal years immediately preceding that date.

The promoter tax disclosure is reported separately from the personal-guarantee action. It lists 24 tax cases with quantified disputed or demanded amounts of Rs 12.29 crore, comprising six direct-tax cases involving Rs 3.34 crore and 18 indirect-tax cases involving Rs 8.95 crore. Those amounts are tax demands in separate categories and are not stated to form part of Bank of Baroda’s $17,461,427.07 claim.

The company’s tax disclosure is also separate from the promoter litigation. Manipal Technologies Limited reported 16 quantified tax cases totalling Rs 143.28 crore, including 15 indirect-tax matters of Rs 142.75 crore and one direct-tax matter of Rs 52.30 lakh. The comparison shows that the personal guarantee is disclosed at promoter level, whereas the corporate-guarantee and lien dispute is disclosed under group-company litigation.

The interim stay has a defined procedural importance. Pai sought to stop further National Company Law Tribunal action and to quash the Section 95 application, and the July 12, 2024 High Court order granted interim relief. Bank of Baroda’s August 20, 2024 application to vacate that relief leaves the continued effect of the stay unresolved in the disclosed record.

Conclusion

Pai’s disclosed position is a pending personal-insolvency action following the February 9, 2023 invocation of a $17,461,427.07 guarantee tied to MVP’s restructured facilities. The July 12, 2024 Karnataka High Court interim stay currently separates the creditor’s demand from any further disclosed progress in the National Company Law Tribunal process.

The next disclosed development is the Karnataka High Court’s consideration of Bank of Baroda’s August 20, 2024 request to vacate the stay. A ruling on that application would address whether the restraint on further action under the Section 95 application continues; the prospectus provides no later ruling, payment, settlement or final insolvency outcome.