PMC Bank’s Depositors Or HDIL’s Homebuyers: Who Is Likely To Win?
HDIL is under IBC but Bombay HC has allowed its assets to be sold in PMC Bank case. This will cost HDIL’s creditors, experts say.
The Punjab and Maharashtra Cooperative Bank crisis and Housing Development and Infrastructure Ltd.’s involvement in it has thrown up a unique situation. On the one side are PMC Bank’s depositors and on the other, HDIL’s homebuyers. The two are agitating before the Bombay High Court and the Mumbai bench of the National Company Law Tribunal, respectively, to recover their dues.
In September, the Economic Offences Wing had arrested HDIL’s promoters—Sarang Wadhawan and Rakesh Wadhawan—on grounds that loans advanced to the company by PMC Bank were diverted by them to their personal accounts. Soon after, the banks’ depositors had filed a public interest litigation before the Bombay High Court to recover their dues. Meanwhile, financial creditor Bank of India and subsequently the homebuyers had initiated insolvency proceedings against HDIL. The National Company Law Appellate Tribunal had allowed the insolvency process to continue after the one-time settlement with the promoters failed.
So, between the PIL by the depositors and the insolvency proceedings by homebuyers, who is likely to win? Piyush Mishra, partner at AZB & Partners, and Sudipta Routh, partner at IndusLaw, shared their views on Insolvency Diaries.
The high court doesn’t have jurisdiction once a company goes into insolvency and justifying this action by saying that these are extraordinary circumstances ought not to be encouraged, Routh said.
The high court is encroaching on NCLT’s jurisdiction. This is not a trend which ought to be encouraged because you will have many piecemeal circumstances like this and unless there is a clear ruling on what can happen in these scenarios, I think this trend is quite disturbing for all the other creditors of HDIL.Sudipta Routh, Partner, IndusLaw
Mishra said perhaps the high court could modify its order to specify that assets on which there’s a moratorium due to the insolvency process against HDIL should be excluded, and it’s up to the resolution professional to make this case before the high court.
I think the resolution professional should intervene in this matter. The order can be modified—there shouldn’t be a challenge as far as assets of HDIL’s subsidiaries are concerned because they are not in CIRP. There is no moratorium on their assets. The issue right now is only qua HDIL’s assets. And assets of the subsidiaries are clearly not HDIL’s. HDIL is only a shareholder. So, only the shares that it holds are subject to moratorium. Therefore, a carve-out is required in the high court order rather than the entire order being reconsidered.Piyush Mishra, Partner, AZB & Partners
Watch the full interview here
Here are the edited excerpts from the interview...
PIL By PMC Bank’s Depositors: Impact On HDIL’s Insolvency
This week, the Bombay High Court made way for PMC Bank’s depositors to recover their dues from HDIL’s assets. A committee, headed by former high court judge Justice Radhakrishnan, has been directed to identify properties of companies owned or controlled by the Wadhawans which are mortgaged solely with PMC bank. The committee has been asked to sell them and use the proceeds to pay off the depositors.
But if this amount isn’t enough, the committee can then sell properties where other financial institutions have equal charge with PMC Bank. In the event of further shortfall, unencumbered properties of HDIL and personal properties of the Wadhawans can also be sold.
To your mind, is this process likely to conflict with the insolvency proceedings that are going on against HDIL?
Mishra: Yes, I think there is a potential conflict because of the wide wording of the order. The overall value of secured assets, including exclusively to PMC Bank as well as to other banks on a pari passu basis, is roughly Rs 11,000 crore. The value of unencumbered assets apparently is Rs 2,600 crore. So, to the extent this includes HDIL’s assets, there is a potential conflict. It would have been ideal if the high court had excluded assets which have a moratorium on them.
How will this impact HDIL’s insolvency process, specially when it’s likely that the high court-directed process could move faster than the IBC process?
Routh: The high court actually does not have jurisdiction. Its jurisdiction is ousted because these are matters in HDIL’s CIRP which is the exclusive domain of the NCLT. It is not an easy thing to say that these are extraordinary circumstances and therefore a genre of creditors ought to be treated differently for interests of the society etc. What has happened with this order is alarming. You have suddenly given a class of creditors far superior rights. You’ve done that outside of the IBC framework, you’ve done it despite the moratorium being in place. This is not insulated from Chapter 3 actions under IBC- Section 43 says that any preferential transaction done while the insolvency process is on can be reversed, even if a court has ordered it. You’ve treated a certain class of creditors in a preferential manner. It may be on account of a court order but it’s still a preferential action. So, there are a bunch of things in this order which can be challenged.
What’s the next logical step from here? Should HDIL’s resolution professional approach the Bombay High Court and present before it the consequences of this order, or does this need to be appealed in the Supreme Court?
Mishra: I think the resolution professional can intervene and seek clarifications, modifications to the order. Once that happens, I am quite positive because courts have been fairly clear to not intervene in IBC processes. A lot of winding up petitions against corporate debtors have been stayed by high courts in view of insolvency proceedings. Of course, if the Bombay High Court disagrees or the order falls short of the full clarification, an appeal can be made to the Supreme Court.