DHFL Insolvency: Proceeds Of Avoidance Applications Should Go To Creditors, Says NCLAT

Any future recoveries made as a result of avoidance applications should go to the creditors of Dewan Housing Finance Corp. and not to the successful bidder—Piramal Group, the National Company Law Appellate Tribunal ruled on Thursday.

The NCLAT directed the committee of creditors to reconsider the provision of the resolution plan that allowed for appropriation of recoveries from the avoidance applications by the successful resolution applicant.

The insolvency proceedings against DHFL started in December 2019 and the plan received NCLT's approval in June 2021. The administrator of DHFL has filed nine avoidance applications worth Rs 45,050 crore before the National Company Law Tribunal. Under the Insolvency and Bankruptcy Code, an avoidance application can be filed by the resolution professional if it is found that the business of the company was being carried with an intent to defraud the the creditors or any fraudulent purpose.

In DHFL's resolution plan, the committee of creditors had ascribed a value of Re 1 against these claims and held that any recovery as a result of these applications would go to the successful resolution applicant Piramal Group.

The debenture holders, led by 63 Moons, moved the appellate tribunal on this aspect.

The NCLAT disagreed with the tribunal’s earlier decision of not interfering with the fate of the proceeds from the avoidance applications.

Delhi High Court Precedent In Favour Of NCD Holders

The case of the debenture holders in the NCLAT was based on an earlier Delhi High Court ruling in the case of Venus Recruiters Private Ltd.

Relying on the high court ruling, the debenture holders had argued that the outcome of avoidance applications was meant to benefit the creditors of the corporate debtor and not the successful bidder after the insolvency resolution.

The NCLAT agreed with the debenture holders saying the high court ruling will apply to DHFL's case. It's the creditors who were allegedly defrauded by DHFL’s promoters and the right to recovery of the amount lies with the people who were defrauded, the appellate tribunal pointed out

CoC’s Commercial Wisdom Cannot Be Cited To Defend Illegality

The NCLAT also dealt with the argument that the commercial wisdom of the creditors' committee should not be interfered.

It pointed out that if a resolution plan consists of any illegalities, the adjudicating authority has the right to interfere and the same cannot be defended on the grounds of commercial wisdom of the creditors committee.

The Insolvency and Bankruptcy Code, the NCLAT said, casts a mandatory duty on the tribunal to ensure that a resolution plan is compliant with the provisions of the law. The NCLAT took the view that Section 67 indicates that recoveries from an avoidance transaction should be distributed among the creditors in the priority mandated under the Code.

Therefore, it cannot be the discretion of the committee of creditors to negotiate the terms against the statutory provision of the Code, the NCLAT said.

NCLAT Also Rejected The Argument Of Estoppel Against NCD Holders

Another ground taken to oppose the plea of the NCD holders was that 63 Moons also voted in favour of the resolution plan which received 93.65% of votes.

This, Piramal Capital & Housing Finance Ltd, argued, barred the debenture holders from raising any objection to the plan.

The NCLAT rejected this argument as well.

The appellate tribunal held that an illegal resolution plan cannot be approved merely on the strength of the majority vote. Hence, the manner in which a member of the CoC votes cannot cure illegality in a resolution plan, it pointed out.

This would also mean that no person, irrespective of how minimal their voting share was in the CoC or how they have voted, can be estopped from challenging illegality or unlawful terms in a resolution plan, the appellate tribunal said.

In conclusion, the bench allowed the appeal by the NCD holders setting aside the provision in the resolution plan that allowed Piramal Group to appropriate recoveries from the avoidance applications. And asked the creditors' committee to reconsider this aspect.