DHFL Insolvency: NCLAT exceeded jurisdiction, misapplied foreign law, says Supreme Court

The Supreme Court has criticised the National Company Law Appellate Tribunal (NCLAT) for overstepping its jurisdiction and misapplying foreign jurisprudence while examining the resolution plan submitted by Piramal Capital and Housing Finance Limited as part of the corporate insolvency resolution process (CIRP) of Dewan Housing Finance Corporation Limited (DHFL)..A Bench of Justices Bela Trivedi and Satish Chandra Sharma yesterday upheld the resolution plan. It also set aside the NCLAT's finding that monies recovered from DHFL that concern fraudulent transactions should go to its creditors and not the successful resolution applicant, Piramal.In its judgment, the Court added, “The NCLAT has also misdirected itself by relying on the foreign texts and jurisprudence, which could not be made applicable to the insolvency regime of India ... it is well settled by this Court that the Court should be wary of transplanting international doctrines, which might have been evolved as responses to the specific needs of the jurisdictional regimes.”.The Court further criticised NCLAT for overstepping its jurisdiction in the case. “The NCLAT therefore 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," it said. .Recoveries from fraudulent transactions of DHFL must go to Piramal: Supreme Court.The case arose from the insolvency resolution process initiated in December 2019 against DFHL, when the Reserve Bank of India (RBI) superseded its board due to financial irregularities. The Committee of Creditors (CoC), comprising major banks and financial institutions, approved Piramal Capital’s resolution plan with a 93.65 per cent majority in January 2021.However, 63 Moons Technologies Limited and fixed deposit (FD) holders, challenged the plan before the NCLAT, arguing that the plan unfairly allowed Piramal Capital to retain recoveries from fraudulent transactions under Section 66 of the Insolvency and Bankruptcy Code (IBC). Furthermore, it was contended that the FD holders were not repaid in full, violating provisions of the RBI Act and the National Housing Bank (NHB) Act.The NCLAT, in January 2022, partially agreed and directed the CoC to reconsider the treatment of Section 66 recoveries, holding that such proceeds should benefit creditors, not the resolution applicant.The FD holders (who remained aggrieved by non-repayment of their full dues), the Union Bank of India (the largest stakeholder in CoC) and Piramal Capital approached the Supreme Court against the NCLAT’s decision. The apex court set aside the NCLAT ruling on the following grounds. .Commercial Wisdom of CoC ParamountThe Court reiterated that the CoC’s commercial decisions are sacrosanct and not subject to judicial interference unless they violate legal provisions.The CoC had negotiated a higher upfront payment (₹37,250 crores) from Piramal in exchange for it giving up and assigning uncertain recoveries from fraudulent transactions to Piramal Capital. The Court observed that this decision was taken in exercise of the CoC's commercial wisdom."The legislature has consciously not provided for a ground to challenge the justness of the 'commercial decision' taken by the Financial Creditors, because one of the dominant purposes of the IBC is revival of the CD and to make it a running concern," the Court added. .Fixed Deposit Holders’ Claims DismissedThe Court dismissed appeals by fixed deposit holders (FD Holders) and non-convertible debenture (NCD) holders, stating that the distribution mechanism under the resolution plan was fair and complied with the IBC. The Court noted that neither the Reserve Bank of India Act, 1934 nor the National Housing Board Act, 1987, stipulate that the Fixed Deposit holders are entitled to full deposits under such circumstances. “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 authorised officer under the NHB Act or the Company Law Board 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," the Court said. It held that the resolution plan’s distribution mechanism—providing full repayment for deposits up to ₹2 lakhs and partial repayment for larger deposits—was fair and complied with the IBC..Distinction Between Avoidance and Fraudulent TransactionsThe Court clarified that applications under Sections 43, 45, and 50 (preferential, undervalued, and extortionate transactions) must benefit creditors, while recoveries from Section 66 (fraudulent trading) can be retained by the resolution applicant if the CoC approves.The NCLAT erred in conflating the two and misapplying foreign jurisprudence, the Court ruled..Ex-Promoters’ Rights ExtinguishedThe Court dismissed appeals by DHFL’s ex-promoters, Kapil Wadhawan and Dheeraj Wadhawan, holding that their board was superseded (not just suspended) under the RBI Act, stripping them of any rights to participate in CoC meetings or access resolution plans during the process."The RBI’s supersession of DHFL’s Board under Section 45-IE of the RBI Act had a permanent effect—the directors ‘vacated their offices,’ unlike mere ‘suspension’ under IBC. They had no right to participate in CoC meetings or demand the resolution plan mid-process," it held. The Court added,"Once approved by the NCLT, the resolution plan becomes a public document under Section 74 of the Indian Evidence Act. The ex-promoters are entitled to a certified copy, but no more.".Thus, it allowed the appeals filed by Piramal and the Union Bank of India.Piramal was represented by Senior Advocates Abhishek Manu Singhvi and Balbir Singh with Advocates Ketan Gaur, Ashish Bhan, Chitra Rentala and Jasmeet Singh..The CoC was represented by Solicitor General Tushar Mehta and Senior Advocate Navin Pahwa with a team from Cyril Amarchand Mangaldas (CAM) comprising Raunak Dhillon, (Partner) Madhavi Khanna (Principal Associate), Aishwarya Gupta (Principal Associate), Niharika Shukla (Senior Associate) and Jeezan Pakhliwal (Associate)..The suspended directors of DHFL were represented by Senior Advocates Kapil Sibal and Gagan Gupta with Advocates Tajas Popat, Mahesh Agarwal, Ankur Saigal, Vishesh Malviya, Shivam Shukla, Pranav Narsaria and EC Agrawala. . Non-Convertible Debentures holders of DHFL were represented by Senior Advocate Nakul Dewan with a team from Juris Corp comprising Aditi Sinha and Rajnandini Singh. .[Read Judgment]