PIRAMAL CAPITAL AND HOUSING FINANCE LTD VS 63 MOONS TECHNOLOGIES LTD. : CASE SUMMARY

The Supreme Court held in Piramal Capital and Housing Finance Ltd. Vs 63Moon Technologies Ltd. Civil Appeal No 1632-1634 of 2022 )  that the Avoidance Applications under Chapter III and the Applications in respect of Fraudulent trading or Wrongful trading under Chapter VI, operate in different situations.

BRIEF FACTS

Dewan Housing Finance Corporation Limited (DHFC) has availed financial facilities from several lenders. DHFL was alleged of several frauds. RBI superseded the Board of Directors and filed Petition under Section 227 IBC for initiating CIRP.  NCLT vide order dated 03.12.2019 admitted the petition and appointed Sh. Mr. R. Subramaniakumar as Administrator. The Administrator received the claims worth Rs.82,247 Crores. The Administrator had appointed M/s. Grant Thornton (GT) as Transaction Auditors for unearthing the transactions under Section 43 to 51 and 66 of IBC. The Administrator, based on the said report of GT, filed eight Applications before the NCLT regarding the Preferential, Undervalued, and Extortionate transactions, and the Applications with regard to the Fraudulent and Wrongful trading. The said Applications are pending for adjudication by the NCLT. The total amount involved in the Avoidance Applications pending before the NCLT is about Rs.45,050/- Crores. Resolution Plan of Piramal Capital was approved   by an overwhelming majority of the CoC with 93.65 % votes.

The erstwhile Director Kapil Wadhawan filed I.A. No. 2431 of 2020 under Section 60(5) of the Code praying for a direction for RBI to place before CoC the 2nd Settlement proposal for consideration. 63Moon filed IA No. 623/2021 before the NCLT challenging the provision of Resolution Plan which provided that the Section 66 Recoveries will go to the benefit of the SRA. The Administrator filed an I.A. No. 449 of 2021  before the NCLT seeking approval of the Resolution Plan.

The NCLT vide its Order dated 19.05.2021 allowed the I.A. No. 2431 of 2020 filed by the erstwhile Director and directed the Administrator to place the 2nd Settlement Proposal before the CoC for consideration and voting within 10 days. the Administrator, CoC and Piramal filed Appeals under Section 61 of the Code challenging the order dated 19.05.2021. On 25.05.2021, the NCLAT while issuing notice stayed the NCLT order dated 19th May, 2021. Further, the NCLAT vide the order directed the NCLT to decide the I.A. No. 449 of 2021 (for approval of the Resolution Plan ). On 06.06.2021, Mr. Kapil Wadhawan filed an I.A. No.1229 of 2021 before the NCLT for consideration of his objections to the RP.

On 07.06.2021, the NCLT passed an order granting its approval to the Plan Approval Application thereby approving the RP. The NCLT vide a separate order, dismissed the I.A. No. 623 of 2021 filed by the 63 Moons. The NCLT refused to interfere with the RP inter alia on the ground that the CoC comprising of 77 financial creditors decided in its commercial wisdom to give away the Section 66 Recoveries to the SRA after a hard bargain in exchange of a lump sum resolution amount of INR 37,250 Crores.

On 15.07.2021, erstwhile Promoter KW preferred Company Appeal No. 539 of 2021 before the NCLAT seeking a prayer to set aside the Resolution Plan.

On 23.07.2021, the NCLAT dismissed the 63 Moons’ interim application for a stay on execution of the approved Resolution Plan. Following this, the 63 Moons approached this Court vide Civil Appeal Nos. 4672- 4673 of 2021. On 03.09.2021 – Roopjyot & Ors. filed a Company Appeal No. 750 of 2021 before the NCLAT challenging the Plan Approval Order raising grounds similar to those which were raised by the 63 Moons. This Appeal was also tagged with the Company Appeal No. 455 and 454 of 2021 filed by the 63 Moons. Pertinently, this was first time that any challenge was raised by Roopjyot & Ors. against the Resolution Plan

On 06.09.2021, the Supreme  Court declined to entertain the Civil Appeal Nos. 4672-4673 of 2021 and disposed of the same with a direction to the NCLAT to decide the pending Appeals expeditiously. On 30.09.2021, the SRA implemented the RP and discharged payment to the creditors. As per the Resolution Plan, the SRA – Piramal merged into the CD by way of a scheme of arrangement. Resultantly, the SRA – Piramal ceased to exist with effect from 30.09.2021, and the CD under the name “DHFL” remained as the continuing legal entity.

On 27.01.2022, the NCLAT passed the common impugned judgment in the Appeals and held that term in the Resolution Plan that permits the SRA to appropriate recoveries, if any, from avoidance applications filed under Section 66 of the Code ought to be set aside. The Resolution Plan  sent back to the CoC for reconsideration on this aspect.

FINDINGS OF THE SUPREME COURT

The Supreme Court determined the following aspects in aforesaid several appeals .

What are the Applications for Avoidance of transactions required to be filed by the Resolution Professional in accordance with Chapter III, and what are the Applications in respect of Fraudulent trading or Wrongful trading required to be filed by the Resolution Professional under Section 66 of the IBC?

TheSupreme Court noted that , the Avoidance Applications under Chapter III and the Applications in respect of Fraudulent trading or Wrongful trading under Chapter VI, operate in different situations. The powers of the Adjudicating Authority in respect of the Avoidance Applications filed under Chapter III and the powers of the Adjudicating Authority in respect of the Applications pertaining to the Fraudulent and Wrongful trading filed under Chapter VI, have also been separately circumscribed.

In the cases of Preferential transactions as contemplated in Section 43, the Resolution Professional may file an Application, when he is of the opinion that the CD, at a relevant time, had given a preference in such transactions, and in such manner as laid down in sub-section (2), to any persons as referred to in sub-section 4 of Section 43. The Adjudicating Authority may pass any of the orders as specified in Clauses (a) to (g) of Section 44, in such Application filed by the Resolution Professional under Section 43(1).

 Similarly, in the cases of Undervalued transactions as contemplated in Section 45, the Resolution Professional may file an Avoidance Application if he determines that certain transactions were made during the relevant period prescribed under Section 46 which were undervalued. In such applications, the Resolution Professional may pray to declare such transactions as void and to reverse the effect of such transaction in accordance with Chapter III. The Adjudicating Authority may pass any of the orders specified in Clauses (a) to (d) of Section 48 in such Application filed under Section 45(1). He may also pass orders specified in Clause (i) and (ii) of Section 49, in respect of the Undervalued transactions referred to in Section 45(2).

In case of Extortionate Credit transactions, as contemplated in Section 50, the Resolution Professional may file Avoidance Application, where the CD had been a party to an Extortionate Credit transaction involving the receipt of financial or operational debt during the period within two years preceding the insolvency commencement date, and where the terms of such transactions required exorbitant payments to be made by the CD. In case of such Extortionate Credit transactions, the Adjudicating Authority may pass any of the orders specified in Clause (a) to (e) of Section 51. It is pertinent to note that in all these types of Avoidance Applications falling under Chapter III, the transactions in question, the properties involved and the persons with whom such transactions were made, could be ascertained by the Adjudicating Authority and therefore it is empowered to pass orders to avoid or set aside such transactions, under Sections 44, 48, 49 and 51, as the case may be.

However, in cases of “Fraudulent or Wrongful trading” in respect of the business of the CD as contemplated in Section 66, the properties and the persons involved may or may not be ascertainable and therefore the Adjudicating Authority is not empowered to pass orders to avoid or set aside such transactions, but is empowered to pass orders to the effect that any persons, who were knowingly parties to the carrying on of business in such manner, shall be liable to make such contributions to the assets of the CD, as it may deem fit. The Adjudicating Authority in such applications may also direct that the Director of the CD shall be liable to make such contribution to the assets of the CD as it may deem fit, as contemplated in Section 66(2). In case of Fraudulent trading or Wrongful trading, it would be a matter of inquiry to be made by the Adjudicating Authority as to whether the business of CD was carried on with intent to defraud creditors of the CD or was carried on for any fraudulent purpose.

In view of the above, the Applications filed in respect of “Fraudulent and Wrongful trading” carried on by the CD, could not be termed as “Avoidance Applications” used for the Applications filed under Sections 43, 45 and 50 to avoid or set aside the Preferential, Undervalued or Extortionate transactions, as the case may be. There is clear demarcation of powers of the Adjudicating Authority to pass orders in the Avoidance Applications filed by the Resolution Professional under Section 43, 45 and 50 falling under Chapter III and the Applications filed by the Resolution Professional in respect of the Fraudulent and Wrongful trading of CD, under Section 66 falling under Chapter VI of the IBC. If the Resolution Professional has filed common applications under Sections 43, 45, 50 and also under Section 66, the Adjudicating Authority shall have to distinguish the same and decide as to which provision would be attracted to which of the Applications, and then shall exercise the powers and pass the orders in terms of the provisions of IBC.

The Supreme Court observed that having regard to the Fraudulent trading and Wrongful trading allegedly made by the DHFL, any guess work done by the compliant RAs would have been a wild guess due to the uncertainties in recovery of the amount involved in such Fraudulent and Wrongful trading. The value of INR 1 being notional and the CoC having considered the fact that the potential recoveries from the Section 66 Applications was very uncertain had taken conscious decision in accepting the said clause in the RP submitted by the SRA. The relevant Clause 2.13.2 of RP provided that any positive monetary recovery received by the company (SRA) as a result of the orders passed in relation to avoidance transactions shall be distributed, net of costs and expenses (including taxes), to the Financial Creditors pro rata to the extent the financial debt for the Financial Creditors provided that the CoC may in its discretion adopt a different manner of distribution. Therefore, while ascribing a notional value of INR 1 to the Applications under Section 66, the SRA had agreed for the distribution of the recoveries that may be made under the Avoidance Applications filed under Sections 43, 45, 47, 49 and 50 for the benefit of the CoC.

The Supreme Court observed that the SRA had raised its offer to the extent of Rs.37,250 crores, which had factored the potential recoveries from Section 66 Applications. Thus, the RP approved by the CoC was an outcome of the commercial bargain struck between the SRA and the CoC after several rounds of negotiations and deliberations. The said plan approved by the CoC was also further approved by the NCLT under Section 31(1) of IBC. In absence of any perversity, that was palpable on the face of the approved RP, and the CoC having taken a firm commercial decision with regard to the impugned clause of RP by voting overwhelmingly in favour of the RP, the NCLAT ought not to have interfered with the said clause of RP approved by the CoC and the NCLT.

Relying on Essar Steel and Ghanshyam Mishra, the Supreme Court observed that the NCLT has clearly transgressed its jurisdiction under Section 61 IBC, by interfering with the clause pertaining to the treatment to the recoveries from the Fraudulent and Wrongful trading under Section 66.

Whether the Resolution Plan violated the provisions of RBI Act or NHB Act ?

Resolution Plan has provided for –  i) FD Holders having an admitted claim of upto  INR 2 lakhs were to be repaid their entire deposit amount; and (ii) FD Holders having an admitted claim of more than INR 2 lakhs would receive an amount equivalent to liquidation value of security created for the benefit of the Depositors for the additional aggregate claim above INR 2 lakhs.

Some of the FD Holders challenged the Resolution Pan on the ground that the treatment to the FD Holders violated their rights under the RBI Act and NHB Act to receive full payment of their deposits. The Supreme Court observed that none of the said provisions mandates full payment of deposits or confers any right upon the depositors to have full payment of such deposits. There is also nothing on record to suggest that any authorized officer under the NHB Act or the CLB under the RBI Act has passed any order to make full payment of deposits to the Appellants. Hence, it could not be said, by any stretch of imagination, that the RP in question, providing for the Distribution mechanism, was contrary to any of the provisions of the RBI Act or of the NHB Act.

Whether erstwhile directors should have been allowed to participate in CIRP ?

The Supreme Court observed that erstwhile directors having deemed to have vacated their offices on the supersession of the Board of Directors under the RBI Act, could not have claimed any right to attend the meetings of CoC or to participate in the CIRP proceedings initiated under the IBC, which right otherwise would have been available to the Directors suspended under the IBC. In absence of any specific provision in the IBC or the Regulations 2016, they, as the members of the superseded Board of Directors, could not have made any claim to have a copy of proposed RPs submitted by the PRAs during the CIRP proceedings. Nonetheless, pertinently the RP after having been approved by the NCLT under Section 31 of IBC, would become a “Public Document” within the meaning of Section 74 of the Indian Evidence Act, and therefore, they would be entitled to get, at the most, a certified copy of the approved RP.

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