Supreme Court upholds Piramal’s resolution plan for DHFL; overrules NCLAT decision

In a landmark judgment, the Supreme Court of India has upheld the resolution plan submitted by Piramal Capital and Housing Finance Limited (formerly Dewan Housing Finance Corporation Limited, or DHFL) for the insolvency resolution of DHFL, setting aside the National Company Law Appellate Tribunal’s (NCLAT) order that had partially modified the plan. The apex court’s decision brings closure to one of India’s most high-profile insolvency cases, involving claims worth over Rs. 82,000 crore.

Background of the Case

DHFL, a prominent housing finance company, faced allegations of financial mismanagement and fraud, leading to its insolvency. The Reserve Bank of India (RBI) superseded its board in November 2019, and the company was admitted into Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC) in December 2019.

Piramal Capital emerged as the successful resolution applicant (SRA) with a resolution plan offering Rs. 37,250 crore, approved by the Committee of Creditors (CoC) with a 93.65% majority. However, the plan faced multiple legal challenges, primarily concerning two contentious issues:

1. Treatment of Recoveries from Avoidance Applications – The plan allowed Piramal to retain recoveries from fraudulent transactions under Section 66 of the IBC, while proceeds from other avoidance applications (Sections 43, 45, 47, 49, and 50) would benefit creditors.
2. Fixed Deposit Holders’ Claims – Several fixed deposit (FD) holders contested the plan, arguing it violated provisions of the RBI Act and the National Housing Bank (NHB) Act by not ensuring full repayment of their deposits.

NCLAT’s Controversial Ruling

In January 2022, the NCLAT partially modified Piramal’s resolution plan, ruling that recoveries from Section 66 applications (fraudulent transactions) should also benefit creditors, not just Piramal. It directed the CoC to reconsider this aspect, a decision challenged by Piramal and the Union Bank of India before the Supreme Court.

Supreme Court’s Verdict

A bench comprising Justices Bela M. Trivedi and Satish Chandra Sharma delivered a detailed 145-page judgment, addressing three broad categories of appeals:

1. Avoidance Applications and Piramal’s Rights

The Supreme Court overturned NCLAT’s ruling, holding that:

• The CoC’s commercial wisdom in approving the plan, including the allocation of Section 66 recoveries to Piramal, is paramount and not subject to judicial interference.
• The distinction between avoidance applications (Sections 43-51) and fraudulent trading applications (Section 66) is legally valid. While the former aims to reverse specific transactions, the latter addresses broader fraudulent conduct, justifying differential treatment.
• The NCLAT erred in relying on foreign jurisprudence and Regulation 37A of the Liquidation Process Regulations, which are irrelevant to the resolution process.

2. Fixed Deposit Holders’ Claims

The court dismissed appeals by FD holders, ruling that:

• Neither the RBI Act nor the NHB Act mandates full repayment of deposits in insolvency proceedings.
• The distribution mechanism under the resolution plan, which prioritized smaller FD holders (those with claims up to Rs. 2 lakhs), was fair and within the CoC’s discretion.

3. Rights of Erstwhile Promoters

The court rejected appeals by DHFL’s ex-promoters, Kapil Wadhawan and Dheeraj Wadhawan, stating:

• The RBI’s supersession of DHFL’s board under Section 45-IE of the RBI Act permanently vacated their offices, unlike suspension under the IBC, which is temporary. Hence, they had no right to participate in CoC meetings or access resolution plans during the process.
• However, post-approval, the resolution plan becomes a public document, and they are entitled to certified copies.

Key Takeaways

• Commercial Wisdom of CoC Upheld: The judgment reinforces the primacy of the CoC’s decisions in insolvency resolutions, limiting judicial intervention.
• Clarity on Avoidance Applications: The ruling clarifies the legal distinction between different types of avoidance applications under the IBC.
• FD Holders’ Rights Defined: The court affirmed that statutory deposit insurance or full repayment claims do not override the IBC’s resolution mechanism.

Also Read: Piramal Group says NCLAT order not to affect DHFL acquisition; to contest order in apex court