In recent developments in the DHFL Insolvency matter pending before the NCLT, an interesting turn of events have taken place which are sure to make a lasting impact on the Insolvency regime. A Bench comprising of Justice A.I.S Cheema and Mr. V.P. Singh of the National Company Law Appellate Tribunal (“NCLAT”) on 25.05.2021 stayed the order dated 19.05.2021 (“Impugned Order”) passed by the NCLT Mumbai Bench wherein the NCLT had directed the Committee of Creditors (“CoC”) of Dewan Housing Finance Limited (“DHFL”) to consider, decide, vote and inform the outcome on the settlement proposal of Kapil Wadhawan (Former promoter of the DHFL) within 10 days of the passing of the Order. This direction was passed by the NCLT in spite of the Resolution Plan submitted by Piramal Capital & Housing Finance Limited (PCHFL) having already been approved by the CoC as well as the RBI, and already placed before the NCLT. The stay order passed by the NCLAT has now been challenged by Kapil Wadhawan before the Supreme Court.
INTRODUCTION
The introduction of the Insolvency and Bankruptcy Code, 2016 (“IBC”) in India has brought about a significant reform in the corporate sector. It is considered as the biggest economic reform next only to GST. It was passed with the intention to tackle the increasing problems of Non-Performing Assets (NPA) and the difficulties caused in the Banking system due to loan defaulting in India. It is after much deliberation of various committees starting from the L.N. Mitra Committee of the RBI set up in 2001 right up till the Bankruptcy Law Reforms Committee (“BLRC”) that the IBC, 2016 was conceived. Since, the IBC is a recent legislation and the first of its kind, it has its share of drawbacks and anomalies and that is why it has already gone through multiple amendments. The IBC (Amendment) Act, 2017 introduced the ineligibility criteria for a Resolution Applicant via Section 29A which barred certain people from being admitted as resolution applicants. This included undischarged insolvents, wilful defaulters and those whose accounts have been classified as NPAs. The ineligibility criteria under Section 29A under the Amendment Act also had its fair share of critics who targeted Section 29A as being too wide and practically excluding everybody in the financial sector, leaving no alternative but foreign registered asset restructuring companies to bid, thereby defeating the very purpose of the IBC. However, the same is very much in operation currently.
BACKGROUND OF THE DHFL INSOLVENCY
DHFL is a Non-Banking Financial Company (“NBFC”) providing housing loans to home buyers. It is the third largest pure play mortgage lender and was the first Financial Service Provider (“FSP”) to be referred to Insolvency proceedings by the Reserve Bank of India (“RBI”) in 2019. The procedure was initiated by the RBI on 20.11.2019 by invoking its powers under section 45-IE of the RBI Act, 1934 which empowers the RBI (“Appropriate Regulator”) to supersede the Board of Directors of an NBFC and appoint an “Administrator” in public interest or to prevent the affairs of such company being conducted in a manner detrimental to the interest of the depositors or creditors or of such company itself in order to improve the financial stability of the company. The Appropriate Regulator in terms of the aforementioned provision, superseded the Board of Directors of DHFL and appointed Mr. R Subramaniakumar as the Administrator. Thereafter, the RBI initiated the Insolvency proceedings before the NCLT, Mumbai Bench against DHFL under section 227 read with section 239(2)(zk) of the IBC and rules 5 & 6 of the Insolvency & Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (“FSP Rules”). The Corporate Insolvency Resolution Process (“CIRP”) was initiated by the NCLT vide its order dated 03.12.2019 and the Administrator was appointed as the Resolution Professional (“RP”).
What is to be seen here is that with regard to the board of directors, the legislature has used the word “supersede” in the provisions of the RBI Act, 1934 as opposed to the word “suspend” in IBC. This has been consciously done to draw a clear distinction between a regular Insolvency proceeding initiated by the financial creditors and the proceedings initiated by the Appropriate Regulator. The word suspend means that the board of directors has been suspended for a particular time duration and can be re-instated, however, the word “supersede” used in the RBI Act means that the existing board of directors ceases to exist and are terminated with the appointment of the Administrator. Therefore, the effect of the word “supersede” is that the ousted board of directors, which have caused the financial instability due to misconduct or negligence in the first place, are not allowed to meddle or interfere with the resolution process in order to acquire the company back.
RESOLUTION PLAN
After various meetings of the CoC led by the Union Bank of India and multiple resolution plans submitted by various firms, Piramal Capital and Housing Finance Ltd. (PCHFL) with its bid of Rs. 34,250 Crores emerged as the highest bidder with 93.65% votes of the CoC in its favour as opposed to the 45% votes in favour of the U.S. based Oaktree Capital. The Resolution Plan of PCHFL was approved by the CoC in its 18th meeting held on 15.01.2021 and subsequently, the RBI issued No Objection under Rule 5 (d) (iii) of FSP Rules on 16.02.2021 for change of control and ownership to PCHFL. Thereafter, the Resolution Plan of PCHFL was placed before the NCLT, Mumbai Bench under Section 31 of IBC and is currently pending adjudication.
SETTLEMENT OFFERS BY ERSTWHILE PROMOTER
Multiple efforts during this time were made by Kapil Wadhawan, Ex-Chairman cum Managing Director (“Ex-CMD”) of DHFL to acquire back DHFL by offering One-time settlement proposals to the creditors. The First Offer Proposal in December 2020 was bluntly rejected by the CoC on the ground that the same is not legally tenable as there is no locus standi of the Ex-CMD to place any such offer proposal. A repeated attempt was made by the Ex-CMD by placing a Second Settlement Proposal before the Administrator wherein the former promoter of DHFL repeated his offer to pay 100% of the default amount, i.e. Rs 91,000 Crores to the creditors within 7-8 years with an upfront payment of Rs. 9000 Crores. However, due to the blunt rejection of the CoC of the first settlement proposal, Kapil Wadhawan preferred an application before the NCLT, Mumbai Bench seeking consideration of second settlement proposal by the CoC. It was on this application of Kapil Wadhawan that the NCLT, Mumbai Bench, in complete disregard to the provisions of the IBC, RBI Act and the FSP Rules passed the Impugned Order wherein it directed the Administrator to place the second settlement offer before the CoC and further directed the CoC to consider, decide, vote and inform the outcome within 10 days to the NCLT. It is extremely shocking to see that the NCLT passed such an order when the Resolution Plan of PCHFL having received the approval of the CoC and the nod of the RBI was already pending adjudication before the NCLT. The Impugned Order passed by the NCLT forms an extremely dangerous precedent which would further harm the financial stability of the Corporate Debtor rather than improve it.
APPEAL BEFORE THE NCLAT
The Impugned Order was challenged before the NCLAT by the CoC of DHFL led by Union Bank of India on various procedural as well as substantial irregularities. The Ld. Solicitor General appearing on behalf of the CoC of DHFL contended the following:
i. That the Ex-CMD Kapil Wadhawan had no locus standi to place a settlement offer before the CoC as the same would amount to making a backdoor entry in order to acquire back DHFL, which has been expressly barred by Section 29A of the IBC. Moreover, the CIRP had been initiated by the RBI under the FSP Rules considering defaults and mismanagement by the Ex-CMD, and therefore, the very same promoters who have been superseded by the RBI cannot interfere in the Resolution Process.
ii. That neither the settlement proposals of Kapil Wadhawan fell under the category of a Resolution Plan, nor did it form part of the procedure under Section 12A of the IBC which provides for withdrawal of the Insolvency proceedings subject to a settlement. The settlement proposal of Kapil Wadhawan was a camouflage used as a precursor to an application under section 12A of the IBC merely in order to stall the CIRP initiated against DHFL.
iii. That the Second Settlement Proposal was not at all distinguishable from the First Settlement Proposal which had already been rejected by the CoC with substantial reasons challenging its maintainability.
iv. That even the personal guarantee issued by Kapil Wadhawan had been already invoked.
The Appropriate Regulator contended before the NCLAT that even affording an opportunity to Kapil Wadhawan, who is currently in judicial custody and is facing multiple criminal investigations by departments such as the ED, CBI and the EOW on allegations of fraud, cheating and siphoning off of funds, to present a settlement offer to the creditors is amounting to permitting him to take benefit of its own wrong, which led to the downfall of DHFL in the first place and therefore, the Impugned Order needs to be set aside.
NCLAT DECISION
The Hon’ble NCLAT came to the rescue of the CoC, the Resolution Applicant and the Appropriate Regulator by staying the Impugned Order till the final disposal of the appeal and prevented a dangerous precedent from being established. It expressed that prima facie irregularities were found with the Impugned Order and therefore a stay order till the disposal of the appeal is essential. The method adopted by the Ex-CMD Kapil Wadhawan in order to halt and derail the Resolution process was stopped by the NCLAT and it was held that the matter had proceeded to the stage where the Resolution Plan had been approved by the CoC, received the consent of Appropriate Regulator and was already before the Adjudicating Authority and that there would be no end if such reversals are allowed. It was further held by the NCLAT that if a No Objection from the Appropriate Regulator is necessary for the Resolution Plan under Rule 5(d)(iii) of the FSP Rules, how can section 12A of the IBC be invoked by the Corporate Debtor without such a prior approval of the Appropriate Regulator. The NCLAT, hence, raised serious concerns about the legal issues involved and the effect of the Impugned Order passed by the NCLT. Passing of an order by the NCLT without any settling such legal issues would lead to a chaotic situation and a harmful precedent for the future cases which would ultimately end up jeopardising the financial condition of the Corporate Debtor even more. The stay order passed by the NCLAT has been challenged by Kapil Wadhawan before the Hon’ble Supreme Court on the ground that being an interim order, it has the nature of a final order because if PCHFL’s Resolution plan is approved in the meantime, his petition before the Supreme Court would be infructuous. Wadhawan has also stated before the Supreme Court that the settlement proposals offered by him are in the nature of Section 12A of the IBC and therefore they should be allowed consideration by the CoC.
CONCLUSION
The NCLAT’s bold decision to stay the Impugned Order dated 19.05.2021 passed by the NCLT in the DHFL Insolvency matter is sure to send tremors across the terminated board of directors of NBFCs and FSPs undergoing CIRP. It will also act as a precedent in order to stop the former managements of Corporate Debtors from trying to intervene in the Resolution Process. Once the board of directors is superseded due to mismanagement, misconduct, or negligence, it cannot make a backdoor entry by making settlement offers to the creditors, that too when the Resolution Plan has already been approved by the CoC, the RBI and placed before the NCLT. The purpose of IBC is to revive the Corporate Debtor by vesting control in a new management which will retain the Debtor as a going concern while clearing the dues of the creditors. Providing an opportunity of intervention in the Resolution Process to the board of directors that caused the default in the first place would be akin to opening a window after shutting the door.
It is also relevant to see that the NCLT, Mumbai Bench while passing the Impugned Order has in fact gone against the very principles which it laid down itself while refusing one of the former promoters of DHFL Dheeraj Wadhawan from taking part in the CoC meetings. While refusing the former promoter to be a part of the CoC meetings, the NCLT clarified that the intent of the legislature in making provisions for removal of directors from office in terms of section 45-ID and for supersession of the board of directors of an NBFC (FSP) in terms of section 45-IE was to move quickly to replace the Board of Directors when there is some default or negligence in the performance of its duties which may become prejudicial to the interest of the society. It was also further clarified by the NCLT while refusing the former promoter to be part of the CoC meetings, that once the Board of Directors of the company is superseded, it indicates a severance with the existing leadership of the company. In other words, it provides for the death of the Board as it existed and once the period of supersession expires, the original Board is not automatically restored, but is required to be reconstituted in terms of section 45-IE (7) of the RBI Act, and therefore, the ‘superseded’ Board of Directors cannot be equated with a ‘suspended’ Board of Directors within the meaning of section 24 of the IBC.
Vide the Impugned Order, the NCLT has completely failed to apply the principles of interpretation laid down by the Hon’ble Supreme Court in Phillips India Limited v. Labour Court (1985) 3 SCC 103andUnion of India v. Glaxo India Limited & Anr. (2011) 6 SCC 668 wherein the Hon’ble Supreme Court had expressly stated that the provisions of a statute must be read and construed as a whole in order to give effect to the intent of the legislature while drafting the statute. The Supreme Court in a plethora of judgements has laid down that the general rule of interpretation which prescribes the construction of the statute must applied to all statutes unless expressly stated otherwise.
For now, the Hon’ble NCLAT has only stayed the Impugned Order, however, it has raised serious concerns in the Impugned Order passed by the NCLT which is in contravention of the principles expressed by itself in its earlier orders and the ratio laid down by the Hon’ble Supreme Court in the aforementioned judgements. The stay granted by the NCLAT has now been challenged by Kapil Wadhawan before the Supreme Court and now it is incumbent upon the Hon’ble Supreme Court as to whether it will uphold the stay granted by NCLAT, which is sure to provide a protective shield to the creditors and resolution applicants from such dubious methods of acquiring back the Corporate Debtor by the defaulters, or will it set aside the stay granted by the NCLAT, thereby paving a way for the flailing efforts of the ousted managements of the Corporate Debtors by providing them a backdoor route.
The NCLAT’s bold decision to stay the Impugned Order dated 19.05.2021 passed by the NCLT in the DHFL insolvency matter is sure to send tremors across the terminated board of directors of NBFCs and FSPs undergoing CIRP. It will also act as a precedent in order to stop the former managements of corporate debtors from trying to intervene in the resolution process. Once the board of directors is superseded due to mismanagement, misconduct, or negligence, it cannot make a backdoor entry by making settlement offers to the creditors, that too when the resolution plan has already been approved by the CoC, the RBI and placed before the NCLT.