DHFL Insolvency: Timing Of NCLT Order Surprising, Says Administrator
DHFL image used for representational purpose (Source: BloombergQuint)

DHFL Insolvency: Timing Of NCLT Order Surprising, Says Administrator

The administrator of Dewan Housing Finance Corp. has questioned the curious timing of Mumbai National Company Law Tribunal’s May 19 direction to the creditors’ committee.

The order of the NCLT has the effect of disrupting the strict timelines under the insolvency code. The CoC is being compelled to vote on promoter Kapil Wadhawan’s settlement proposal against its commercial wisdom, the administrator said in its petition before the appellate tribunal.

Last week, the NCLT had directed DHFL’s committee of creditors to put up Wadhawan’s offer for “consideration, decision and voting” within 10 days on grounds that due procedure was not followed.

The order, DHFL’s administrator has pointed out, comes four months after the hearings on this issue were concluded, during which the CoC-approved Piramal Group plan was submitted with the NCLT. BloombergQuint has reviewed a copy of the administrator’s petition before the National Company Law Appellate Tribunal.

The NCLT’s May 19 order is surprising and in conscious disregard of judicial economy, the administrator has said.

It has questioned the curious timing of the May 19 order in light of the bench’s term.

Between March 24 and May 17, the bench heard and reserved 12 matters relating to DHFL’s insolvency. In no other matter, besides Wadhawan’s application, has the bench passed an order, the petition has pointed out.

“.. the present bench’s term is scheduled to expire on or around the first week of June 2021, and any delay could result in all the above having to be re-argued, jeopardising the chances of a successful and timely resolution of the CIRP. It is at such belated stage the adjudicating authority passed the impugned order [on May 19]…” – DHFL’s Administrator

Misleading Settlement Proposals

Besides questionable timing, the administrator has detailed why the creditors’ committee didn’t consider Wadhawan’s settlement proposal. It has pointed out that:

  • Oct. 17, 2020: Wadhawan offered to sell properties that he had valued at Rs 43,879 crore to settle all claims. This proposal was vague and did not mention if it should be treated as a resolution plan under the code or it should be treated as a settlement proposal which would be guided by the Section 12A of the code.

  • Oct. 27, 2020: It was communicated to Wadhawan that his proposal was belated since he had not submitted an expression of interest as per IBC timelines. That his eligibility to submit a plan was unclear. And finally, the properties he was offering to sell were encumbered and not of the value suggested.

Wadhawan had marked these letters to the Reserve Bank of India as well. Any proposal under 12A of the IBC must be initiated by the applicant who initiated the insolvency, which in DHFL’s case is the RBI.

That the RBI had chosen to not act on these letters demonstrates that the regulator did not find these proposals credible, the administrator has stated.

  • Dec. 13, 2020 or the first proposal: Wadhawan offered principal repayment to creditors in full in seven-eight years, and an upfront payment of Rs 9,000 crore. This was considered and rejected by the CoC at its 18th meeting.

  • Dec. 31, 2020 or the second proposal: Wadhawan offered around Rs 91,000 crore. This letter was sent by him after being well aware that the CoC had already voted on legally compliant plans on Dec. 25. The second proposal suffered the same legal and commercial infirmities as the first.

The same day, Wadhawan also approached the NCLT for a direction to the CoC to consider his second proposal. During the arguments on this application in January, the CoC and the RBI had both opposed any relief to Wadhawan.

“…the only intent of the second proposal was to set the stage for litigation.” – DHFL’s Administrator

NCLT Uncritically Accepted Wadhawan’s Statement

In its May 19 order, the NCLT stated it has not expressed any opinion on the feasibility or viability of Wadhawan’s plan. But at the same time, it validated Wadhawan’s baseless submission that the second proposal is actually worth Rs 91,158 crore, according to the administrator.

The tribunal incorrectly failed to recognise any legal basis, either under the Section 29A or the Section 12A, for second proposal.

“..instead choosing to simply accept respondent 1’s [Wadhwan] baseless statement that this was a “precursor” to a settlement proposal under the Section 12A of the code: a concept not recognised under any provision of law.” – DHFL’s Administrator

The Section 29A lays down ineligibility criteria for resolution applicants and 12A allows for withdrawal of insolvency proceedings subject to certain conditions.

In this case, the due process for withdrawal, the administrator has pointed out, would entail:

  • The RBI, having initiated DHFL’s insolvency, would have to justify the withdrawal given that this was done after the expression of invitation.

  • The RBI would need to procure a bank guarantee towards the specified expenses in support of the proposal put forth by Wadhawan.

  • The proposal would need approval by 90% of CoC.

  • Only after this, the RBI can approach the NCLT.

Finally, the administrator has stated that Wadhawan is ineligible to submit a plan under the Section 29A, DHFL’s account has been classified as ‘fraud’ due to his conduct, preferential transaction applications worth Rs 45,000 crore are pending against him, lenders have invoked personal guarantees provided by him, and personal insolvency proceedings are pending against him.

And so, it is inconceivable and impossible in law to expect the RBI to initiate withdrawal on the basis of a flimsy proposal replete with misrepresentations, falsehoods, without financial backing or commitments, and tendered in complete disregard to the statutory scheme of the insolvency code.

The NCLT order, the administrator has argued, must be dismissed and the tribunal should be directed to pass its order on CoC-approved plan within a week.

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