Recoveries from fraudulent transactions of DHFL must go to Piramal: Supreme Court

The Supreme Court on Tuesday ruled that recoveries of money under the Insolvency and Bankruptcy Code (IBC) related to fraudulent transactions by Dewan Housing Finance Corporation Ltd (DHFL) must be paid to the successful resolution applicant, Piramal Capital & Housing Finance Ltd, not the DHFL's creditors..A Bench of Justices Bela Trivedi and Satish Chandra Sharma made the observation while upholding the resolution plan for DHFL.The top court has thus set aside a judgment of the National Company Law Appellate Tribunal (NCLAT), which had held that such monies must go to creditors. "Judgment and order by NCLAT is set aside. Order passed by NCLT is upheld. NCLT shall decide avoidance applications. Recoveries from avoidance shall be given to CoC, while recoveries from fraudulent transaction must be paid to Successful Resolution Application (Piramal)," the Court ordered..The Bench also emphasised the limited role of an Adjudicating Authority (National Company Law Tribunal) while approving or rejecting a resolution plan that has passed the muster of the Committee of Creditors (CoC).The Supreme Court has further ruled that the resolution plan, in this case, is compliant with the banking laws in force. A copy of the order is awaited. .The case concerns the insolvency resolution process initiated against DHFL in 2019 on an application by the Reserve Bank of India, which claimed a default by DHFL in the repayment of an External Commercial Borrowing (ECB) loan to the State Bank of India (SBI).The CoC eventually approved a resolution plan submitted by Piramal Capital. The plan assigned a token value of ₹1 to potential recoveries from fraudulent transactions under Section 66 of the IBC, effectively allowing Piramal to retain any future proceeds from such recoveries. The NCLT upheld this resolution plan. This provision was challenged by 63 Moons Technologies Ltd and other fixed deposit holders (creditors), who argued that any proceeds from fraudulent transactions should rightfully be distributed to creditors rather than the resolution applicant. According to 63 Moons, the CoC ascribed a value of ₹1 to recoveries that could amount to ₹ 40,000 crore. .The NCLAT ruled in favour of the creditors, making several key observations:Recoveries from avoidance transactions are intended to benefit creditors, not resolution applicants. Sections 43-51 and 66 of the IBC provide mechanisms to reverse fraudulent or preferential transactions that unfairly deplete the corporate debtor’s assets. The purpose of these provisions is to restore value to the insolvency estate, ensuring creditors receive their rightful dues. The CoC cannot override statutory mandates. By assigning a nominal value of ₹1 to potential recoveries from avoidance applications, the CoC attempted to circumvent the law and unjustly benefit the resolution applicant. The tribunal emphasized that statutory provisions take precedence over commercial decisions made by the CoC. The NCLT failed in its duty to scrutinize the resolution plan’s legality. Under Section 30(2) of the IBC, the adjudicating authority must ensure that a resolution plan complies with legal provisions before approval. The NCLAT found that the NCLT failed to properly examine the legality of the ₹1 valuation of avoidance recoveries..The NCLAT thus sent back the resolution plan to the CoC for reconsideration.This prompted Piramal to file an appeal in the Supreme Court, which had in April 2022 stayed the order of NCLAT.