NCLAT Questions Possibility Of Liquidation Of Startups Like OYO With No Assets On Ground

The National Company Law Appellate Tribunal (NCLAT), which is currently hearing an insolvency case against hospitality unicorn OYO has raised concerns on whether the insolvency and bankruptcy code (IBC), 2016 can be fully applied to startups with intangible assets. 

The NCLAT is currently hearing an insolvency plea that was originally filed against an OYO subsidiary named OYO Hotels and Homes Private Limited (OHHPL) by a hotelier named Rakesh Yadav in April under the bankruptcy and insolvency code in NCLT. Yadav’s company Yellow White Residency Hotel demanded clearance of dues worth INR 16 lakhs in his plea before the court on April 1. However, Yadav had reportedly settled his disputed amount of INR 16 lakhs with OYO before the next hearing. 

Over the course of the case, the NCLAT held at least six hearings until June 8. In these two months, several former OYO hotel partners have come forward and filed for claims worth INR 250 Cr with the tribunal which is yet to be verified by the court.  

In the hearing conducted on June 21, all the claimants had submitted their invoices, and proofs in a hard copy before the court, and these documents will now undergo verification before the NCLAT. The IRP also submitted a list of creditors who have sought claims from OYO, said an order document dated June 21.

“Learned Counsel for the Respondent No. 2/ IRP has filed the list of Creditors (including Financial, Operational, Workmen & Employees and Other Creditors) and Security Interest on 17.06.2021, which is taken on record,” said the order which Inc42 reviewed. 

However, during the hearing, the NCLAT bench remarked that since OYO is a startup with very few tangible assets, it is unclear whether liquidation could take place. 

“NCLAT judges made reservations about conducting IBC proceedings on OYO…The judge raised concerns about whether to carry forward a hefty IBC process against a unicorn startup. The judge said that since Internet startups like Ola and OYO derived their value from non-tangible assets, it’s unclear how liquidations can take place,” said a person aware of the June 21 hearing asking to remain anonymous.

OYO Rooms did not respond to an email seeking comments from Inc42 until the publishing of this article.

Interestingly, similar comments were made during a hearing in Delhi HC when a hotel partner working with OYO had earlier taken the hospitality startup to court in June 2020 over alleged non-payment of dues. At that time, a bench headed by the Delhi HC ordered OYO to file an affidavit detailing unencumbered (debt-free) assets owned by the firm. The order came in the light of a case filed by hospitality company Anam Datsec, which had accused OYO of non-payment of dues for its Golden Sands property at Calangute in Goa and sought more than INR 8 Cr in damages.

However, OYO has similar legal cases filed by other property owners against it, seeking several crores in damages. At that time, Sameer Rohtagi, the advocate representing Anam Datsec told Mint that the total size of alleged unpaid dues owed by OYO to many property owners contesting parallel cases could amount to a higher value than the actual value of properties the startup currently owns, according to Rohatgi.

“By ordering OYO to file a statement of truth (affidavit) detailing its value of unencumbered assets, the court is validating whether the company has enough liquidity in the event they (OYO) could be asked to settle damages during the arbitration process,” Rohatgi said.

Nevertheless, in the ongoing NCLAT case, the court has now received claims from more than 40 ex-OYO hotel partners, however, these claims are still to be verified under a legal process. OYO also approached the Supreme Court recently to expedite the hearing date of its ongoing insolvency hearing in the NLCAT. 

Under the insolvency process, the Federation of Hotel & Restaurant Associations of India (FHRAI) on behalf of hoteliers and other independent OYO hotel partners submitted claims worth INR 90 Cr with the court.

In an earlier statement on June 5, 2021, OYO said that it “vehemently denies” all the unverified claims being made in the ongoing insolvency resolution process with the NCLAT. Currently, the NCLAT matter is adjourned till June 23, 2021. 

OYO further highlighted that the interveners have “no locus (standi) in this matter” and that the disputed claims are not grounds for intervention. “The company also denied the unverified and baseless rumours being made around the monetary claims involved in the matter,” the hospitality startup added.