Supreme Court Dumps NCLAT Verdict; Recovery From DHFL’s Fraud Deal Goes To Piramal

Supreme Court Dumps NCLAT Verdict; Recovery From DHFL’s Fraud Deal Goes To Piramal

The matter was about the Corporate Insolvency Resolution Process initiated in 2019

The Supreme Court has ruled that the money recovered from the illegal transaction by Dewan Housing Finance Corporation Ltd (DHFL) should go to the successful resolution applicant, Piramal Capital & Housing Finance Ltd, under the Insolvency and Bankruptcy Code (IBC).

A bench of Justice Bela Trivedi and Justice Satish Chandra Sharma set aside the judgment of the National Company Law Appellate Tribunal (NCLAT), which held that the amount must go to DHFL’s creditors.

The court held, “The order of the NCLAT is upheld. The National Company Law Tribunal (NCLT) shall decide the avoidance applications. The recoveries from avoidance shall be given to the Committee of Creditors (CoC), while the recoveries from fraudulent transactions must be paid to Piramal.

The judges highlighted the limited role of the NCLT while approving or rejecting a resolution plan (RP) passed by the CoC. They ruled that the RP was compliant with the banking laws.

The matter was about the Corporate Insolvency Resolution Process (CIRP) initiated against DHFL in 2019 on an application by the Reserve Bank of India (RBI). It claimed a default by DHFL in the repayment of an External Commercial Borrowing (ECB) loan to the State Bank of India (SBI).

Eventually, the CoC approved the RP submitted by Piramal.

The plan assigned a token value of Rs.1 to potential recoveries from fraudulent transactions under Section 66 of the IBC. This allowed Piramal to retain the future proceeds.

The NCLT had upheld the RP.

However, 63 Moons Technologies Ltd and other fixed deposit holders (creditors) challenged the provisions. They submitted that the proceeds from illegal transactions should be distributed to creditors rather than the resolution applicant. They added that the CoC ascribed a value of Rs.1 to recoveries totalling Rs.40,000 crores.

The NCLAT ruled in favor of the creditors, citing:

• The recoveries from avoidance transactions are intended to benefit the creditors, not the resolution applicants. Sections 43-51 and 66 of the IBC provide mechanisms to reverse fraudulent or preferential transactions that unfairly deplete the corporate debtor’s assets. The provisions restore value to the insolvency estate, ensuring creditors receive their dues.
• The CoC cannot override the statutory mandates. By assigning a nominal value of Rs.1 to potential recoveries from avoidance applications, the CoC circumvented the law, unjustly benefitting the resolution applicant. The provisions take precedence over the CoC’s commercial decisions.
• The NCLT failed to scrutinize the RP’s Rs.1 valuation of avoidance recoveries legality. Under Section 30(2) of the IBC, it must ensure that the RP complies with the provisions before approval.

Thus, the appellate tribunal NCLAT thus remitted the RP for reconsideration by the CoC.

Aggrieved by the decision, Piramal appealed before the top court, which stayed the order of the appellate tribunal.