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McDonald’s India, CPRL cut ties; LCIA orders Bakshi to sell CPRL stake
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Saturday, 16 September, 2017, 08 : 00 AM [IST]
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Ashwani Maindola, New Delhi
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McDonald’s India and its estranged partner CPRL’s decision to go separate ways has taken a knotty turn with only 43 out of the 169 restaurants in north and east India going out of operation. The rest seem to operate as usual.
The controversy over issue of royalties that has been simmering for about two years, came to a boil when McDonald’s India Pvt. Ltd (MIPL) decided to cut its ties with Connaught Plaza Restaurants Pvt. Ltd (CPRL) and shut shop in 169 places in north and east India. In tune with the decision, MIPL issued a letter to suppliers of cheese, sauce and various other ingredients to stop business with CPRL in the regions concerned.
A spokesperson for McDonald’s in an email statement, explained the scenario, “As the master franchisor in India, earlier this week, MIPL informed CPRL's suppliers that we have terminated our franchise agreements with CPRL for all 169 restaurants in north and east India. As such, CPRL must cease the use of the McDonald's system effective September 6. CPRL is not permitted to operate McDonald's restaurants. As of now, we will continue to take steps to enforce the termination of the franchise agreements, but are unable to discuss specific plans or courses of action.”
Another spokesperson chipped in, “The termination notice period has ended on September 5. Therefore, CPRL is no longer authorised to use the McDonald's system and its intellectual property. It means they need to stop using the McDonald's names, trademarks, designs, branding, operational and marketing practice and policies, and food recipes and specifications. We are proceeding with exercising our legal and contractual rights.”
Further, in an earlier statement, it claimed, “McDonald’s was compelled to take this step because of CPRL’s violation of certain essential obligations, including defaulting on the payment of royalties to McDonald’s India. The situation lasted almost two years, during which McDonald’s India provided CPRL with an opportunity to remedy the breaches, but it failed to do so. They were fully aware of these essential terms in the franchise agreement, including the consequences of a breach.”
Faceless organisation
However, Vikram Bakshi, joint venture partner and MD, CPRL, hit back and called McDonald’s India a ‘faceless organisation’ and gave a point by point rebuttal to the allegations against CPRL.
In an email reply to F&B News, he stated, “A faceless corporation has indulged in hostile acts since 2008, but has stooped to an all time low with impetuous actions completely unmindful of the implications of these unwise and ill-intended acts.”
He added, “Let's start by readdressing the so-called “default royalty payments,” CPRL has been a robust company and always honoured its commitments to banks, vendors and business associates over the years till 2013. CPRL has paid MIPL (the wholly-owned subsidiary of McDonald’s in India) Rs 238 crore, while their investment in the business has been Rs 192 crore. Not having an MD since Aug 2013, the company was rudderless. The foreign nominee directors have always been aware of the non-payment of royalty since late 2015 and this has been known to them every week through MIS reports and emails over the past few years too. They are well informed of the outstanding payments to vendors, banks and the status royalty payments too.”
Bakshi pointed out, “In fact, the foreign nominee director, Aysel Melbye, has, via emails, on more than one occasion, given her consent to recommendations by CPRL to pay off vendors and banks whilst deferring royalty payments. So for them to be crying foul about non-payment of royalty now, is rather paradoxical don't you think?”
According to Bakshi, CPRL was forced to repay loans to the tune of Rs 46 crore over the last year. He alleged that CPRL had never, since its inception, repaid such a large bank loan in such a short time. Had this money not been diverted onto the bank by the nominee directors of McDonald’s on the Board of CPRL (with ulterior motives), the balance payment of Rs 60 crore of royalty from Oct 2015 to date would have also been made.
Bakshi, further, raised question of favoritism in its operations in India.
He said, “While McDonald’s has been charging and taking full 5% royalty from CPRL, it has given a royalty write-off to its development licensee i.e Hardcastle Restaurants P Ltd/Westlife Development Ltd which operates in west & south India since 2010. It gave royalty write off 3% for years 2010-2012, 2% for years 2012-2014 and since 2015 till date a royalty write off of 1.5%. By this waiver it has written off over (Rs) 100 crore in royalty to HRPL/WDL. Why this favoritism? There is much more than meets the eye.”
Bakshi charged that the foreign nominee directors on the board of CPRL have themselves not come to the office of CPRL for any meetings in person since August 2013 and March 2016.
On the operations of 169 restaurants, Bakshi stated, “The termination of the Operating License Agreements/Franchise Agreements was clearly a hostile and mindless action that was taken by McDonald’s Corporation through its wholly- owned subsidiary, McDonald’s India Pvt. Ltd / MIPL when it found its nefarious scheme of usurping the company and the equity shares of its equal partner and shareholder in the business that CPRL operates.”
Verdict of NCLT
He declared, “McDonald’s has clearly been unable to accept the scathing verdict of the NCLT (National Company Law Tribunal) pronounced on July 13, 2017, and hence continued its malicious and damaging acts against their equal partner and also CPRL by terminating the Franchise Agreements. Note, McDonald’s had the time and opportunity to have taken this drastic and damaging step (cancelling the Franchise Agreement) when they terminated the JV in 2013 too. They did not do so and in fact, have enjoyed earning their royalty till June 2017! So why now?”
Bakshi explained that subsequent to McDonald’s terminating the operating franchise agreements with CPRL restaurants on August 21, 2017, it has been slapped with a Show Cause Notice of Contempt by the NCLT on a charge under Section 425 of the Indian Company's Act, which is holding them guilty of Contempt of a court order - the Final Judgment of the NCLT pronounced on July 13, 2017, that restored the position of Vikram Bakshi as the MD of CPRL calling it "illegal, unjust and mala fide." He said, “For anyone to be held in contempt of Indian law is a serious matter and it has criminal liabilities if the law holds good such contempt.”
Judgment
He charged that the relevant clause of the judgment that has been violated was 41 (vi), which reads as follows:
"Respondent number 5 is restrained from interfering with the smooth functioning of Connaught Plaza and all its 154 restaurants open in the assigned territory of north/east India." Respondent number 5 is the McD Corporation.
On the closure of the restaurants, Bakshi stated, "The question to ask is, who gains by the closure of 169 restaurants? After all, this is a business operation with two equity shareholders who hold equal stakes. Has this become a “personal” vendetta against the Bakshi’s? This is seemingly the position as no sensible senior management or businessman would even contemplate this irrational business decision, leave alone try to implement it, and cut the branch that the company is sitting on. Has McDonald’s become a politically thinking organisation? Or is it that the lawyers have been given some “extra” leeway in management and are having a field day paying out fees to their associates for some reason?”
He also raised questions that this had put jobs and livelihoods of thousands of employees in jeopardy, the lives and business of innumerable suppliers would be adversely impacted, those of the landlords, as also all other business associates would be damaged. ”There is more to it than meets the eye,” he reiterated.
“McDonald’s track record over these past few years reflects total disdain for Indian law in their quest to destroy the hardwork of their equal partner and all the Indians who contributed to create this business over 20 years. Is this the general approach of the US corporations - my way or the highway? Is this the message they are trying to send to the judicial system in India, the Indian business community and India at large? Should India be permitting this," he asked on a concluding note.
The matter related to joint venture termination is now at the National Company Law Tribunal and the next hearing is scheduled for September 21, 2017.
Bakshi to transfer CPRL shares
Meanwhile, the London Court of International Arbitration (LCIA) has directed Bakshi, McDonald’s’ partner in India, to sell his stake in the CPRL to the United States-based quick service restaurant (QSR) chain, according to reports.
In a 2:1 majority award, the arbitration panel has asked him to transfer his shares in the 50:50 joint venture (JV) to McDonald’s India at a fair valuation in accordance with their JV agreement.
The LCIA also directed the appointment of a panel of independent experts to determine the fair market value for McDonald’s to buy out Bakshi’s stake.
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