The National Company Law Tribunal, Mumbai Bench (Hon'ble NCLT) in application filed by Mr. R. Subramaniakumar, Administrator of Dewan Housing Finance Corporation Limited (Administrator) against the Committee of Creditors, through Union Bank of India & Ors. in the matter Reserve Bank of India (RBI) versus Dewan Housing Finance Corporation Limited (DHFL) (IA.NO.449/MB/C-II/2021 in CP(IB)No. 4258/MB/C-II/2019) has approved the resolution plan submitted by Piramal Capital & Housing Finance Limited (Piramal Group) in the corporate insolvency resolution process (CIRP) of DHFL (DHFL Judgment).

Nuances of this case

The Insolvency and Bankruptcy Code 2016 (IBC) is applicable to the financial service providers subject to the provisions of the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules 2019 (FSP Rules), which came into force on 15 November 2019.

DHFL is the first financial service provider to undergo CIRP. Financial service providers are engaged in providing financial services such as accepting deposits, safeguarding assets consisting of financial products, effecting contracts of insurance, managing financial products, rending advice for the purpose of buying, selling, or subscribing to a financial product, establishing or operating an investment scheme, maintaining or transferring records of ownership of financial products, underwriting the issuance or subscription of financial products, providing payment services.

Unlike any other CIRP, where the financial creditors/operational creditors initiate CIRP, DHFL was driven to CIRP by the market regulatory itself i.e., RBI.

RBI was concerned regarding the governance and payment obligation defaults of DHFL. In light of this, prior to CIRP of DHFL, RBI in its press release stated that RBI has superseded the board of directors of DHFL and has appointed the Administrator as an administrator of DHFL in terms of the Section 45-IE of the RBI Act 1934. The RBI also expressed its intention to initiate CIRP of DHFL. Subsequently, RBI constituted a 3 (three) member advisory committee to assist the Administrator. Thereafter, RBI filed a company petition before the Hon'ble NCLT for initiating the CIRP of DHFL which was allowed and CIRP of DHFL was commenced on 3 December 2019.

The invitation for expression of interest published by the Administrator invited expression of interest (EOI) from the prospective resolution applicants under 2 (two) options. Considering the complexity and scale of operation of DHFL, the Administrator in consultation with the committee of creditors (CoC) of DHFL categorised the business of DHFL into 3 (three) 'Groups'. First option allowed EOIs for the entire business of DHFL as a going concern and the second option allowed EOIs for 1 (one) or more 'Groups' as a going concern.

The resolution plan submitted by the Piramal Group was approved by the CoC of DHFL with 93.65% votes. A major structural change in DHFL post approval of the resolution plan is that DHFL can no longer accept deposits. Rule 5 (d) (ii) of the FSP Rules required the Administrator to seek no objection of the RBI to the control or management of DHFL after approval of the resolution plan by the NCLT. In this regard the RBI has granted the no objection subject to the change in status of DHFL from deposit taking housing finance company to non-deposit taking housing finance company.

Majority of the workforce of DHFL is from its sister concern, DHFL Sale and Services Limited (DSSL). Pursuant to a prayer made by the Piramal Group, the Hon'ble NCLT has directed DSSL to continue to provide manpower services to DHFL as per the existing terms for a period of 1 (year) or till expiry of the contract period, whichever is later.

The NCLT observed that many small investors have invested their funds for an interest income to meet their needs in DHFL. In view of this for the benefit of the small investors the Hon'ble NCLT directed the Piramal Group to reconsider the distribution method for small investors as to not have them take more hair cut than financial institutions and so that they get an increased share of money from the resolution plan submitted by the Piramal Group. The Hon'ble NCLT clarified that the Piramal Group is not obligated to infuse additional money over the committed amount of INR 37,250 Crores, however only the manner of distribution of the said amount between public depositors, fixed deposit holders, non-convertible debenture holders, small investors, Employee Provided Fund Trust, army personnel may be reconsidered.

The Hon'ble NCLT suggested the CoC of DHFL to reconsider and pay the full admitted claim amount of Army Group Insurance Fund as a gratitude and respect in view of the nature of duty of the army personnel.

The approved resolution plan provides that money realized from avoidance transactions would be payable to the CoC of DHFL and money realized through fraudulent transactions would be payable to the DHFL/ Piramal Group.

Reiterated paramountcy of the commercial wisdom of CoC

The Hon'ble NCLT observed that it is not expected to substitute its view on conclusion reached by the CoC and that the NCLT has limited jurisdiction to interfere with the commercial wisdom of the CoC. It observed that the Hon'ble NCLT has supervisory jurisdiction over the CoC and it cannot sit in appeal over the commercial wisdom of the CoC. It was further observed that the Hon'ble NCLT is duty bound and legally expected to approve resolution plan except if the resolution plan does not meet the requirement of the Section 30 and Section 31 of the IBC and the applicable regulations.

Comments

As substantial number of financial service providers are operating in Indian market and high financial risk is involved in the nature of business of financial service providers. The first successful resolution of a financial service provided under the FSP Rules has opened avenues for the possible resolution of the debt-ridden financial service providers. However, it is to be seen, how best the future proceedings are going to take care of the interest of the small deposit holders/investors, which appears to have been side-lined in the approved resolution plan.

We have seen that generally the Hon'ble NCLT is not palatable to enter into reliefs, which are sought against counter parties to the existing contracts, however in DHFL Judgment, the Hon'ble NCLT has issued a direction to DSSL to continue to provide manpower services to DHFL as per the existing terms for a period of 1 (year) or till expiry of the contract period, whichever is later, since approximately 80% of workforce of DHFL comes from DSSL.

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