Supreme Court sets aside NCLAT order on DHFL resolution plan dispute

The Supreme Court on Tuesday set aside the National Company Law Appellate Tribunal (NCLAT)’s order that directed the lenders of the erstwhile Dewan Housing Finance (DHFL) to reconsider specific aspects of Piramal Capital and Housing Finance’s (PCHF) resolution plan, which assigned a nominal value of ₹1 to ₹45,000 crore of DHFL’s bad loans categorised as avoidance transactions.

It affirmed the resolution plan for the DHFL, which the Union Bank of India-led Committee of Creditors (CoC) and the National Company Law Tribunal (NCLT)’s Mumbai bench approved in 2021, and assigned a notional value of ₹1 to potential recoveries exceeding ₹45,000 crore. Subsequently, in September 2021, PCHF acquired DHFL for a total consideration of ₹34,250 crore.

Delivering its verdict on the long-running legal battle concerning the DHFL’s resolution plan, a bench comprising justices Bela M Trivedi and Satish Chandra Sharma directed that NCLAT will decide afresh the applications surrounding the allocation of proceeds from avoidance transactions amounting to ₹45,000 crore. It was a key point of contention in the insolvency process of the former non-banking financial company.

Under the Insolvency and Bankruptcy Code (IBC), avoidance transactions are those identified as undervalued, fraudulent, or extortionate by the former promoters.

DHFL, which was among India’s leading housing finance companies, collapsed under a debt burden of ₹90,000 crore and was referred to insolvency proceedings under the IBC in November 2019. As part of the resolution process, the CoC approved PCHF’s takeover for ₹37,250 crore.

A major point of dispute arose when the approved resolution plan ascribed a value of merely ₹1 to recoveries from avoidance transactions, which included allegedly fraudulent transfers made by the former management.

Former promoter Kapil Wadhawan and 63 Moons Technologies, a non-convertible debenture holder with an exposure of over ₹200 crore in DHFL, challenged this valuation. They argued that the Piramal Group acquired a company with ₹45,000 crore worth of potentially recoverable assets at a negligible valuation while smaller creditors were being forced to settle for as little as 23 paise per rupee.

In January 2022, NCLAT intervened, directing the CoC to reconsider the resolution plan’s treatment of avoidance recoveries. The lenders, along with Piramal Capital, challenged this ruling in the Supreme Court, saying that the appellate tribunal overstepped its authority and misinterpreted the IBC provisions governing such transactions.

The case gained significance as it involved the interpretation of Section 66 of the IBC, which mandates that any proceeds from fraudulent or undervalued transactions should revert to the corporate debtor rather than being assigned to specific creditors or bidders. The lenders insisted that their commercial wisdom should dictate how these recoveries were handled.

Piramal Capital argued that revising an already-approved resolution plan would violate the fundamental principles of insolvency resolution and set a dangerous precedent.

In its judgment on Tuesday, the court held that it would be for NCLAT to take a fresh call on how and under which provisions of the IBC these applications are to be decided. In April 2022, the Supreme Court stayed the NCLAT order, allowing the lenders and Piramal to proceed with the takeover while keeping the dispute over avoidance recoveries unresolved. After two years of hearings and deliberations, the court pronounced its final ruling.