DHFL case: Lenders, Administrator file appeals in NCLAT against NCLT order to consider Wadhawan's settlement offer

On May 19, the Mumbai bench of the NCLT had directed the Administrator to place the Rs 91,158 crores "settlement offer" from DHFL's former promoter Kapil Wadhawan before the Creditors Committee for its consideration, decision and voting, and to inform the NCLT of the decision within 10 days time.

“The Adjudicating Authority (NCLT), in passing the Impugned Order, has overlooked relevant facts and settled law, ignoring the submissions and contentions of not only the Appellant (Administrator) and the CoC, but also the RBI,” the appeal read.

It calls out the May 19 order as “incorrectly failing to recognise any legal basis, either under Section 29A or Section 12A, which underlay the Second Proposal (Wadhawan’s settlement offer dated December 29, 2020), instead choosing to simply accept Respondent 1’s (Kapil Wadhawan) baseless statement that this was a “precursor” to a settlement proposal under Section 12A of the Code: a concept not recognised under any provision of law.”

While Section 29A of IBC prohibits wilful defaulters, undischarged insolvents, promoters of defaulting firms etc from participating in the resolution, Section 12A deals with withdrawing a company from bankruptcy proceedings, but on the condition that 90 percent of the creditors committee supports the resolution, and the withdrawal application is filed by the applicant who initiated the insolvency proceedings in the first place.

If Wadhawan’s offer was to even be considered under Section 12A of the IBC, it would entail: (1) RBI, who initiated the CIRP after itself superseding DHFL’s Board, would have to justify the withdrawal given that this was done after the invitation of EoI (2) RBI would need to procure a bank guarantee towards the specified expenses in support of the proposal put forth by Kapil Wadhawan; (3) the CoC would need to approve by 90%; and only thereafter would the RBI approach the NCLT.

RBI had already made submissions in the matter, noting that Wadhawan has various grave proceedings pending against him including in respect of cheating, fraud, siphoning of funds, and being in judicial custody of the same- the Administrator said in the appeal. “The RBI is recorded as having submitted that in these circumstances, permitting Respondent 1 (Kapil Wadhawan) to even present a purported settlement could be equivalent to permitting Respondent 1 to benefit from its own wrongs. The Adjudicating Authority (NCLT) has declined to even deal with these submissions by the RBI,” the Administrator said.

The CoC also “categorically opposed the grant of any relief, making it clear that it had applied its mind to the Second Proposal (Wadhawan’s settlement offer), and taken a conscious decision that it did not want to accept the same.”

The Administrator said that NCLT was fully aware that Kapil Wadhawan is also party to transactions worth about Rs 46,000 crores which have been challenged as “fraudulent and/or otherwise wrongful under the Code (IBC), on the basis of reports submitted by an independent transaction auditor after a thorough transaction audit.”

Lenders have also declared DHFL a “fraud” account, and therefore Kapil Wadhawan’s eligibility to even submit any resolution plan would be not allowed as per Section 29A of the IBC, the administrator explained.

The Administrator termed Kapil Wadhawan’s settlement offer commercially unsound, adding that its only intent was to “set the stage for litigation,” and to “sabotage the CIRP (corporate insolvency resolution process).” “It is clear that the Second Proposal has been deliberately designed to mislead and deceive stakeholders,” the Administrator said in the NCLAT appeal.

The Administrator in his appeal has said that DHFL’s timely resolution is “a matter of national importance and is critical for macroeconomic stability and the interests of several public sector banks, fixed deposit holders and foreign creditors.”

“The Impugned Order records that it is neither a resolution plan subject to the rigors of Section 29A of the Code, nor is it a settlement application under Section 12A of the Code that needs to be moved by the RBI. However, despite the same, the Impugned Order manufactures a new category of a ‘precursor’ to a “one time settlement” or “OTS”, and uses its inherent powers under the NCLT Rules to contravene specific provisions of the Code and re-examine and re-open commercial negotiations on behalf of a promoter whose offers have clearly been held to be not worthy of acceptance by the CoC,” read the appeal.

The Committee of Creditors also separately filed an appeal with the NCLAT against the NCLT order earlier today. It has sought that NCLAT set aside NCLT’s May 19 order, and to also direct the NCLT to expeditiously pass an order for the approval of Piramal Group’s resolution plan, which was approved by the CoC and the RBI earlier, and is pending the court’s nod.

“There is no provision in law or more specifically under the Code which permits passing of such orders. Further, that the Impugned Orders have been passed contrary to the express provisions of the Code inter alia under Section 12A of the Code ("Section 12A") and Regulation 30A ("Regulation 30A") of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 ("CIRP Regulations"),” the CoC said in its appeal.

The CoC added that the NCLT had passed the order without considering any of the submissions in law or made by the CoC, Administrator or RBI. “It is also the case of the CoC that the Impugned Orders have the effect of derailing the entire CIRP ofDHFL (which is already at a very advance stage, with the resolution plan approved by the CoC already pending consideration by the Hon'ble NCLT in the Plan Approval Application) and that the Hon'ble NCLT ought to be directed to pass orders in the Plan Approval Application as per law,” it said.

In its appeal, the CoC said there was no provision of the law, or IBC, which compelled them to consider the settlement offer from Wadhawan. “The CoC cannot be compelled to consider every proposal which is given by persons who elect not to participate in the CIRP of the Corporate Debtor (as per the prescribed process), ever where such offer is made by promoters of the Corporate Debtor. Such an order compelling the CoC to consider every offer by the promoter who was once in control of the corporate debtor would greatly and gravely hamper the CIRP and cause inordinate delays, and materially as well as adversely impact the sanctity of the process in which the CIRP of the Corporate Debtor has been conducted since its inception,” it said.

It further said, “The Hon'ble NCLT has sought to unravel the entire CIRP and create a new settlement process solely on the basis of an illusionary promise made in the Second Offer. Without prejudice, it is well established that the commercial decisions and commercial wisdom of the CoC are not open to review.”

Lenders believe that the order, if not quashed, would not just be detrimental to the insolvency resolution of DHFL, but to the larger ecosystem as well, and set a bad precent.

“If Impugned Orders (from NCLT dated May 19) were allowed to operate, it would be extremely prejudicial as it creates a new process which is contrary to the express provisions of the Code and if allowed the CIRP of a corporate debtor will be a never ending process where parties will be permitted to keep making new offers, without any regard to the sanctity of the process or timelines, including after the CoC has already exercised its commercial wisdom and approved a resolution plan which has been submitted by an eligible resolution applicant in compliance with the Code, related regulations and the process relating to the insolvency resolution of the relevant corporate debtor,” read the appeal.