DHFL Resolution: CoC in a spot after NCLAT’s ruling on “illegal” stipulation

Bankers are now in a quandary after the NCLAT recently ruled that the Committee of Creditors (CoC) decision to approve the resolution plan of the beleaguered DHFL was “illegal” and the plan containing an “illegal” stipulation on recovery of avoidance transactions is not sustainable.

The core committee of the CoC, which looked into the recent NCLAT directive, is now caught in a dilemma as their legal advisors are urging the CoC to appeal to the Supreme Court. At the same time, the debenture trustee (representing NCD holders and part of CoC) is opposed to any such move, sources privy to the developments said. The ball is now in CoC’s court as it has to take the difficult decision of which way to move — either adhere to NCLAT directive or file an appeal before Supreme Court, they added. 

Under the Insolvency and Bankruptcy Code (IBC), “avoidance transactions” are recognised as undervalued, fraudulent or extortionate by the previous promoters.

It maybe recalled that CoC had as part of the resolution plan agreed to Piramal Group ( winning resolution applicant) getting all future recoveries of bad loans (amounting to about ₹38,000 crore) falling under avoidance transactions and accepted ₹1 from Piramals as the value assigned for such a benefit. 

Several critics had frowned at the CoC move to accept Piramal Group’s ₹1 as the value assigned for avoidance transactions and even alleged it as a “sweetheart deal” between the bankers and Piramal Group. They contended that the banks should have been careful before accepting Piramal Group’s ₹1 as the value assigned for avoidance transactions amounting to ₹ 38,000 crore (without interest component). Some critics even alleged that these Bankers’ act of omission are deliberate and not an oversight.

This move of CoC to accept and assign a value of ₹1 on avoidance transactions had raised several eyebrows, and 63 moons ( one of the creditors with ₹200 crore invested in DHFL NCD’s) had challenged this CoC decision.

In its appeal, 63 moons asked whether the Piramal group could appropriate all recoveries from avoidance applications filed under Section 66 of the IBC just because the CoC has agreed to assign a completely arbitrary and unrealistic value of one rupee. It cited a Delhi High Court judgement in Venus Recruiters Private Limited to back its claims, saying the bankruptcy laws of the countries like the US also advocate creditors benefit, directly or indirectly

63 moons had argued before the adjudicating authorities that the Piramal Group could not appropriate all recovery from the vast amount of DHFL loans listed in ‘avoidance applications’ under Section 66 of the Insolvency and Bankruptcy Code (IBC).

It was submitted that IBC provisions on avoidance transactions provided that recoveries on this count should go for the benefit of all creditors alone and that too in the order of priority coming under the “waterfall mechanism” stipulated in the IBC.

Last month, the NCLAT had —in the matter of the 63 moons challenge —set aside the term in the Resolution Plan that permitted Piramal Group (successful resolution applicant) to appropriate recoveries from avoidance transactions. 

The Appellate Tribunal had sent the authorised resolution plan back to the CoC to r reconsider this aspect of the valuation of avoidable transactions that pertain to the recoverable belongings.

The NCLAT has described this term in the resolution plan (accepting ₹ 1 ) as “illegal” as it has ruled that all recoveries on avoidance transactions should go for the benefit of only the creditors and not the successful resolution applicant. 

While some still point out that the Indian bankruptcy law does not allow the commercial wisdom of banks to be questioned, the real issue in the 63 moons appeal is not about commercial wisdom, but the appeal is about overlooking rights creditors have under Section 66, company law experts said.

For giving this ruling, NCLAT had noted that the bankruptcy laws of the countries like the US also advocate creditors’ benefit, directly or indirectly. The Appellate Tribunal has also pointed out to the rulings that have come out of foreign courts on this matter.

From time to time, the US Courts have observed that any recovery from avoidance actions must be equitably distributed to the debtor’s creditors, according to the dictates of the code. 

The UK Courts have also reiterated a similar view –“a sum recovered from a creditor who has been wrongly preferred enures for the benefit of the general body of creditors not for the benefit of the company or the holder of the floating charge. This is because it does not become part of the company’s assets but is received by the liquidator impressed with a trust in favour of those creditors amongst whom he has to distribute the company’s assets”.

Last September, DHFL, which had outstanding debt of over ₹ 90,000 crore, was acquired by the Piramal group for ₹ 37,250 crore. As part of the deal, it also got all the ‘bad loans’ listed under ‘avoidance applications’ under Section 66 of the IBC. These bad debts add up to a huge ₹38,100 crore (without interest), which is more than the Piramals paid to acquire DHFL.

“Any decision taken by the committee of creditors which strikes at the very heart of the Code cannot simply be upheld under the garb of commercial wisdom. In other words, the COC’s decision to approve the resolution plan submitted by Respondent No.2 (Piramal Group) which contains unlawful stipulations concerning intelligible bifurcations of recoveries under two similarly placed sets, is unsustained in the eyes of law. Accordingly, it is illegal, and the plan containing such an illegal stipulation is not sustainable”, NCLAT said in its order.

The NCLAT order has noted that in bidding for DHFL, the Piramal group had not factored in any recoveries from avoidance transactions. In fact, it was argued that there would be minimal recovery and, hence, a value of one rupee was ascribed to this large outstanding.

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