NCLAT asks DHFL lenders to reconsider resolution plan on avoidable transactions valuation aspect

In a significant development, appellate tribunal NCLAT on Thursday directed the lenders of DHFL to reconsider their decision regarding the valuation of the financial firm’s avoidable transactions while approving the insolvency resolution plan submitted by Piramal Capital & Housing Finance Ltd.

Under the insolvency resolution proceedings for the crisis-hit DHFL, Piramal Capital had emerged as the winning bidder and the Committee of Creditors (CoC) had ascribed a value of just Re 1 for Rs 45,000 crore-worth recoverable assets of DHFL. These were assets apparently diverted fraudulently by the erstwhile promoters of DHFL.

A member bench of the National Company Law Appellate Tribunal (NCLAT) has now sent the approved resolution plan back to the CoC in order to reconsider the aspect of the valuation of avoidable transactions that pertain to the recoverable assets. Under the Insolvency and Bankruptcy Code (IBC), avoidance transactions are those which are identified as undervalued, fraudulent or extortionate by the former promoters.

The latest ruling has come on a plea filed by 63 Moons Technologies, which has an exposure to DHFL’s Non-Convertible Debentures (NCDs) worth Rs 200 crore. 63 Moons was also classifed as a financial creditor. The resolution plan, which was voted in favour by the CoC, was approved by the Mumbai bench of the National Company Law Tribunal (NCLT) on June 7, 2021. As per the plan, a notional value of Re 1 was given for all recoveries under Section 66 of the IBC whereby applications for recovery of assets worth over Rs 45,000 crore was filed by DHFL administrator.

Section 66 pertains to transactions in connection with fraudulent trading. According to the NCLAT, avoidance transactions were not factored in the resolution plan and hence the matter needs to be reconsidered. “Moreover, there is no material on record to suggest that the avoidance transactions have been factored in respondent No 2 (Piramal) resolution plan. “Therefore, the oral contention of the respondents that the avoidance transactions have been factored in the resolution plan amount is unsupported and not borne out from the material on record,” the NCLAT said.

The appellate tribunal also rejected the arguments of the lenders and Piramal that the possibility of recovering money from avoidance transactions was very low. At the same time, the NCLAT noted that the amount of the actual recovery that may be made in the future is entirely irrelevant. In its petition, 63 Moons cited a recent judgement passed by the Delhi High Court to contend that it was held that that avoidance application were meant to give benefit to the creditors of the corporate debtor but not for the corporate debtor in its new avatar after the resolution plan approval. In the Venus judgement, the high court had also said that such avoidance applications will not be for the benefit of the resolution applicant after the resolution process was complete.

According to the NCLAT, while approving the resolution, section 30(2)(e) of the IBC requires that the resolution plan does not contravene any of the provisions of law for the time being in force. Section 30(2)(e) mandates the resolution plan should not contravene any of the provisions of the law for the time being in force. The appellate tribunal said in the present case, the administrator referred the matter to the CoC to decide on the applicability of the Venus judgement in providing the outcome of avoidance transactions to the successful resolution applicant Piramal Capital. “The Adjudicating Authority (NCLT) has not taken any decision about the applicability of the Venus judgement on the issue of providing the outcome of avoidance transaction to the resolution applicant,” the appellate tribunal said. A 63 Moons spokesperson said the NCLAT on Thursday ordered its petition to be considered by the CoC.

“With this order, now the CoC have to reconsider the provision of section 66 of the IBC which mandates that the benefit should go to all the creditors of DHFL. However, the CoC had, in its resolution plan, overlooked this provision to the benefit of Piramal Group. “If CoC considers this without alteration of provision of section 66 of the IBC, all creditors of DHFL will be benefited. 63 moons is the only company which challenged the decision of CoC in NCLAT,” the spokesperson said.

DHFL is undergoing insolvency resolution proceedings after the NCLT, on November 20, 2019, admitted Reserve Bank of India’s plea over governance concerns and defaults at the company. The Reserve Bank of India had superseded the DHFL’s board of directors and appointed an administrator to manage its affairs.


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