FILE PHOTO: A woman walks past a signboard of Dewan Housing Finance Corporation Ltd. (DHFL) outside its office on the outskirts of Mumbai, India, Jan. 31, 2019. REUTERS/Francis Mascarenhas/File Photo | Photo Credit: FRANCIS MASCARENHAS
Committee of Creditors can either adhere to ruling or appeal to the SC
Bankers are now in a quandary after the NCLAT recently ruled that the Committee of Creditors’ (CoC) decision to approve the resolution plan of DHFL was “illegal”; the plan containing an “illegal” stipulation on recovery of avoidance transactions was not sustainable.
CoC’s core committee, which looked into the recent NCLAT directive, is now caught in a dilemma as its legal advisors are urging it to appeal to the Supreme Court. At the same time, the debenture trustee (representing NCD holders and part of CoC) is opposed to any such move, sources privy to the developments said. The ball is now in CoC’s court as it has to take the difficult decision of either adhering to NCLAT’s directive or filing an appeal before Supreme Court, they added.
‘Avoidance transactions’
Under the Insolvency and Bankruptcy Code (IBC), “avoidance transactions” are recognised as undervalued, fraudulent or extortionate by the previous promoters.
It may be recalled that CoC had, as part of the resolution plan, agreed to Piramal Group (winning resolution applicant) getting all future recoveries of bad loans (amounting to about Rs. 38,000 crore) falling under avoidance transactions and accepted Rs. 1 from Piramals as the value assigned for such a benefit.
Several critics had frowned at the CoC move to accept Piramal Group’s Rs. 1 as the value assigned for avoidance transactions and even alleged it was a “sweetheart deal” between the bankers and Piramal Group.
They contended that the banks should have been careful before accepting Piramal Group’s Rs. 1 as the value assigned for avoidance transactions amounting to Rs. 38,000 crore (without interest component). Some critics even alleged that the bankers’ act of omission is deliberate and not an oversight.
CoC’s move to accept and assign a value of Rs. 1 on avoidance transactions had raised eyebrows, and 63 moons (one of the creditors with Rs. 200 crore invested in DHFL NCDs) had challenged this CoC decision.
In its appeal, 63 moons asked whether the Piramal group could appropriate all recoveries from avoidance applications filed under Section 66 of the IBC just because the CoC had agreed to assign a completely arbitrary and unrealistic value of Rs. 1.
It cited a Delhi High Court judgment in Venus Recruiters Private Ltd to back its claims, saying the bankruptcy laws of countries like the US also advocate creditors benefit, directly or indirectly; 63 moons had argued before the adjudicating authorities that the Piramal Group could not appropriate all recovery from the vast amount of DHFL loans listed in ‘avoidance applications’ under Section 66 of the IBC.
It was submitted that IBC provisions on avoidance transactions provided that recoveries on this count should benefit creditors alone and, that too, in the order of priority coming under the “waterfall mechanism” stipulated in the IBC.
The resolution plan
Last month, the NCLAT had — in the matter of the 63 moons challenge — set aside the term in the resolution plan that permitted Piramal Group (successful resolution applicant) to appropriate recoveries from avoidance transactions.
The Appellate Tribunal had sent the authorised resolution plan back to the CoC to reconsider this aspect of the valuation of avoidable transactions that pertain to the recoverable belongings.
The NCLAT has described this term in the resolution plan (accepting Rs. 1) as “illegal” as it has ruled that all recoveries on avoidance transactions should benefit only the creditors and not the successful resolution applicant.
While some still point out that the Indian bankruptcy law does not allow the commercial wisdom of banks to be questioned, the real issue in the 63 moons appeal is not about commercial wisdom but about overlooking the rights that creditors have under Section 66, company law experts said.
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