Vijay Mallya's "flamboyant lifestyle" coming in the way of settling bank claims: Karnataka High Court

The Karnataka High Court on Wednesday opined that former Kingfisher Airlines promoter Vijay Mallya’s “flamboyant lifestyle” appears to be hindering the closure of loan recovery proceedings pending against the now-defunct airline [Diageo Holdings Netherlands B V & others Vs SBI & others].

A Division Bench of Justice DK Singh and Justice T M Nadaf made the observation while granting relief to Diageo Holdings Netherlands BV in a dispute concerning shares held by Vijay Mallya in United Breweries Limited (UBL), which were pledged in connection with a loan.

The Court held that Diageo's claim ranked higher than the entitlement of the banks to these shares.

Notably, the Court also observed that the banks had already recovered assets worth ₹14,131.6 crore against the ₹6,203-crore loan given to Kingfisher Airlines. The Court, therefore, held that the banks were not justified in staking a claim over UBL shares as well.

"When the Consortium of Banks’ claim for their dues against the loan of INR 6,203 crores has got almost settled by making recovery of assets worth more than INR 14,131.6 crores, there would be no justification for their claim over the UBL shares," the Court held.

It went on to observe that Mallya's extravagant lifestyle appears to be the reason why the loan dispute with the banks is yet to be settled.

"More than anything else, we are also of the view that it is Dr. Vijay Mallya’s flamboyant lifestyle, excessive personal indulgence and his personal vanity are coming in the way of giving quietus to the claims of the Consortium of Banks against the loan of INR 6,203 crores advanced to the defunct Kingfisher Airlines Ltd," the Court observed.

The Bench added that it is up to the bank consortium and the government to close the loan recovery proceedings now.

"It is for the Consortium of Banks and the Government of India to give quietus to the proceedings when INR 14,131.6 crores worth of assets have been restored to the Consortium of Banks against their loan of INR 6,203 crores," it said.

The Court ruling in fact, started with comments on the downfall of Vijay Mallya's empire, which it linked to excessive personal indulgence, personal vanity, hubris and recklessness.

“The downfall of Vijay Mallya's empire due to a flamboyant lifestyle and excessive personal indulgence is one of the history's most enduring corporate tales,” the Court observed.

It noted that even decades of work could evaporate when the focus shifted from operational excellence and financial prudence to “personal vanity, outsized egos and hedonistic excess.” The Court said that when disciplined grit was replaced by a cult of personality and hubris, the result could be bankruptcy and ruin.

Referring to Mallya’s rise in the liquor business and the expansion of his empire, the Bench noted that he came to be known as the “King of Good Times”, with his flamboyant lifestyle becoming inseparable from the brand he built.

The Court went on to recount that his "debt-fuelled gamble" on Kingfisher Airlines, however, collapsed, eventually leading to his status as a fugitive economic offender.

“Real-world examples like Vijay Mallya, who built ‘a self-made powerful empire only to lose it to reckless gambling and lavish spending’ demonstrate that building an empire takes decades of relentless discipline, but destroying it requires only a few years of unbridled indulgence,” the Court said.

The case before the Court concerned shares of UBL held by Mallya individually as well as shares jointly held by him and his son, Sidhartha Mallya in United Breweries.

Diageo’s claim arose from a USD135 million loan that Standard Chartered Bank (SCB) gave to Watson Ltd, an overseas company of Mallya, in July 2013. The loan was secured by a pledge of the UBL shares, and Diageo guaranteed it. After Watson defaulted, Diageo paid the bank USD 140.97 million in January 2016 and claimed to have stepped into SCB's shoes.

A consortium of banks, however, obtained certain interim orders in recovery proceedings against Kingfisher Airlines, which froze the shares.

The banks claimed that the UBL shares could be used to satisfy ₹6,203 crore dues that Kingfisher Airlines owed them, and that Diageo’s pledge over the said shares was ineffective.

Mallya and UBL had guaranteed the repayment of the loan under a Master Debt Recast Agreement dated December 21, 2010.

Diageo approached the High Court for relief after the Debt Recovery Tribunal (DRT) and the Debt Recovery Appellate Tribunal (DRAT) ruled against it.

The High Court held that the pledge created in favour of SCB in 2013 had priority over the bank consortium’s claim under the 2010 agreement.

The Court also noted that Sidhartha Mallya was not a party to the Master Debt Recast Agreement with the banks and that Mallya’s personal guarantee did not, by itself, create a proprietary charge over the jointly held shares.

The Court proceeded to allow the appeal filed by Diageo and set aside the DRT and DRAT orders under challenge.

Arguments for Diageo Holdings Netherlands were led by Senior Advocate Aditya Sondhi, briefed by advocate Poornima Hatti. Diageo was represented by a team from law firms Samvad Partners and Touchstone Partners comprising Aakash Sherwal, Nikita Ganesh, Suchint Krishna, Yashasvi Mohanram Partner and Vaishnavi Shankar.

Senior Advocate Vikram Huilgol and advocates Kumar MN, Veerendra Patil, Ganapathi Hegde, Krutika Raghavan and Perikal K Arjun appeared for the consoritum of banks led by SBI.

[Read Judgment]