In November 2019, the Dewan Housing Finance Corporation Ltd. (DHFL- a Non-Banking Financial Company providing home loans) was referred to the National Company Law Tribunal (NCLT) by the RBI for insolvency proceedings under the Insolvency and Bankruptcy Code 2016 (IBC) owing to default in meeting its payment obligations. [Insolvency is the inability of individuals or corporates to repay their debts]. This article discusses the latest developments in the context of the Corporate Insolvency Resolution Process (CIRP) against DHFL. [CIRP refers to the entire process through which a company is either resolved or liquidated].
[Read WHAT HAPPENED TO DHFL (DEWAN HOUSING FINANCE CORP)? to know more].
As per the Insolvency and Bankruptcy Code (IBC), upon initiation of CIRP, the powers of the Board of Directors are suspended and are transferred to the committee of creditors (CoC) who act through an administrator. [You may read – THE ULTIMATE GUIDE TO UNDERSTANDING THE INSOLVENCY AND BANKRUPTCY CODE]. In December 2019, DHFL was the first financial services company against which an application was filed under the IBC. This was made possible through an amendment to the Code, which allowed the regulator (i.e., RBI) to file for insolvency proceedings against financial services companies (in which NBFCs are included). RBI also appointed the administrator who would act as the insolvency resolution professional (IP). It further directed the creditors of DHFL to submit their claims with proof to the administrator. In October 2020, claims worth Rs. 87,082 crores were admitted as being due to various financial and operational creditors.
Under the resolution process, open bids to resolve DHFL were invited from interested parties. Amongst the bidders, Piramal Group won the bid receiving over 94% votes for its resolution plan from DHFL’s creditors. Piramal Capital bid Rs. 34,250 crores (about 40 % of the admitted claims) in their resolution plan, which was approved by the Committee of Creditors in January 2021. The plan provided for higher upfront payment to the creditors and infusion of equity. But why would these companies want to buy an entity which is under bankruptcy? It may be because the deal might ultimately yield profits if operated in the right manner. Piramal Group plans to merge DHFL with its financial services business and employ additional staff for its growth.
Meanwhile, DHFL’s former promoter, Kapil Wadhawan [who is currently in jail for his alleged role in the multi-crore Yes Bank scam] had proposed a settlement offer to repay the entire outstanding dues of the creditors. He provided for a repayment of 100% principal to all creditors (totaling about Rs. 91,000 crores). He also proposed to provide an upfront cash payment of a little over Rs. 9,000 crores. According to him, the proposal was fully viable and in the best interest of all the creditors. Further, he also argued that the proposal was way better than the approved resolution plan. However, his settlement offer was rejected by the Committee of Creditors.
[Under Section 12A of the IBC, the applicant (in this case, the RBI) can move an application, after the approval of the Committee of Creditors by a majority of 90%, before the NCLT for withdrawing the original application under which the insolvency process actually began. This usually happens when the erstwhile promoters file an acceptable settlement offer. In the present case, however, the Committee of Creditors had already rejected the settlement offer filed by Kapil Wadhawan as it was ‘commercially unsound’ and meant to delay the insolvency process. Also, Kapil Wadhawan was disqualified under Section 29A of the Code (which bars wilful defaulters and some other categories of promoters from filing resolution plans) to file a resolution plan for DHFL].
In May 2021, NCLT directed the IP to put the settlement plan provided by Kapil Wadhawan for approval of the creditors, giving them 10 days’ time to review the plan. However, the CoC and RBI-appointed administrator filed an appeal against this direction in the National Company Law Appellate Tribunal (NCLAT). According to them, other promoters will also start quoting their settlement offers and delay the entire resolution process. Further, they argued that the order undermined the CoC’s “commercial wisdom” by directing them to consider a settlement offer even after the resolution plan had been adopted with a resounding majority. The NCLAT stayed the order of NCLT, allowing the DHFL resolution process to continue. [However, the NCLAT has not decided on whether the settlement offer filed by Wadhawan must be considered and the matter is still pending]. Wadhawan then moved the Supreme Court to challenge the stay order.
In June 2021, NCLT approved the resolution plan of the Piramal Group. 63 Moons Technologies (a debenture holder of DHFL holding non-convertible debentures worth over Rs. 200 crores) who had earlier voted in favor of Piramal Group’s resolution plan, filed a petition before NCLAT challenging its approval by the NCLT on the grounds that the plan was against the interests of DHFL’s debenture holders. The NCLAT rejected the appeal and declined to stay the Piramal Group’s resolution plan. However, the final order of the NCLAT and Supreme Court in this matter is still awaited.
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