Supreme Court: Applications Filed For “Fraudulent & Wrongful Trading” Carried On By Corporate Debtor Can’t Be Termed As “Avoidance Applications” Under IBC
|The Supreme Court was deciding the Civil Appeals in which one of the Appeals was filed by the Piramal Capital and Housing Limited (formerly known as DHFL), against the common Judgment of the NCLAT, New Delhi.
The Supreme Court held that the Applications filed in respect of “Fraudulent and Wrongful trading” carried on by the Corporate Debtor (CD) cannot be termed as “Avoidance Applications” under the Insolvency and Bankruptcy Code, 2016 (IBC).
The Court held thus in a batch of Civil Appeals in which one of the Appeals was filed by the Piramal Capital and Housing Limited (formerly known as DHFL), challenging the common Judgment of the National Company Law Appellate Tribunal (NCLAT), New Delhi.
The two-Judge Bench comprising Justice Bela M. Trivedi and Justice Satish Chandra Sharma observed, “… 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.”
The Bench added that if the Resolution Professional (RP) has filed common applications under Sections 43, 45, and 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.
Senior Advocates Dhruv Mehta, Maninder Singh, and Kapil Sibal appeared for the Appellants while Senior Advocates Abhishek Manu Singhvi, Balbir Singh, Tushar Mehta, Navin Pahwa, Nakul Diwan, and Advocate Santosh Kumar Paul appeared for the Respondents.
Brief Facts
The Dewan Housing Finance Corporation Limited (DHFL) was a housing finance company and a non-banking financial company regulated under the provisions of NHB Act and RBI Act, engaged in the business of providing housing finance services to retail customers, including under the Pradhan Mantri Awas Yojana (under the credit linked subsidy scheme) as well as certain project loans, mortgage finance and construction loans etc. The DHFL had, for conducting its business availed financial assistance through a range of instruments including inter alia rupee loans, external commercial borrowings, non-convertible debentures, perpetual debentures, subordinate debt, public deposits etc. from banks, financial institutions, other lenders like insurance companies, mutual funds, provident funds, pension funds and individuals. The DHFL was accused of committing India’s one of the biggest financial scams, worth thousands of crores of rupees, involving accusation of loan frauds, money laundering, creating web of fake borrowers and shell companies etc.
In response, the RBI (Reserve Bank of India) superseded DHFL's Board of Directors in November 2019 and filed a Company Petition under the IBC to initiate Corporate Insolvency Resolution Process (CIRP) proceedings. The National Company Law Tribunal (NCLT) admitted the Petition and appointed an Administrator. The Administrator invited bids for Resolution Plans, and Piramal Capital submitted a plan. The Committee of Creditors (CoC) approved Piramal's resolution plan with 93.65% votes. Subsequently, the NCLT approved the resolution plan. However, the Order was challenged by the Respondent i.e., 63 Moons Technologies Limited, a creditor, before the NCLAT. The NCLAT set aside the term in the resolution plan that permitted the Successful Resolution Applicant (SRA) to appropriate recoveries from avoidance applications filed under Section 66 of the IBC. The NCLAT directed the CoC to reconsider the resolution plan. Resultantly, the Appeals were filed before the Apex Court, challenging the NCLAT's Order.
Court’s Observations
The Supreme Court in the above regard, noted, “While considering the feasibility and viability of the Prospective Resolution Plans, the CoC can always suggest a modification therein and exercise its commercial wisdom. However, once the RP is approved by the requisite majority of CoC, and when such RP is placed before the Adjudicating Authority for its approval under Section 31, the Adjudicating Authority has to only see whether such RP as approved by the CoC meets the requirements as referred to in Section 30(2).”
The Court said that the scope of interference by the Appellate Authority i.e., NCLAT under Section 61 in the Appeals arising out of the Order approving a RP under Section 31, is very limited and restricted to the specific grounds mentioned in sub-section (3) of Section 61.
Avoidance Applications
The Court observed, “Both, 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.”
Mandatory Requirements of Section 30(2) of the IBC and Regulation 38 of Regulations, 2016
The Court elucidated that the entire process right from the submission of RPs by the PRAs till the final approval/rejection of the Plan by the Adjudicating Authority has been duly prescribed, which is mandatory in nature.
“If there is any non-compliance of the mandatory requirements stated in Section 30(2) of IBC, readwith Regulation 38 of the Regulations, 2016, the Adjudicating Authority is empowered to reject the plan as envisaged in sub-section (2) of Section 31. If however, the plan approved by the CoC as per Section 30(4), meets with the requirements under Section 30(2), the Adjudicating Authority has to approve such plan under Section 31(1), which would be binding to all the stakeholders as stated therein”, it added.
Maximization of the value of the assets of the Corporate Debtor
The Court said that the CoC, if after considering measures for maximization of the value of the assets of the CD as proposed by the RA in the RP submitted by it, and considering the feasibility, viability and such other requirements as mandated in the IBC and in the Regulations, 2016, approves the plan with the requisite number of votes as required under Section 30(4), after exercising its commercial wisdom, then the scope of judicial review by the Adjudicating Authority under Section 31 will be limited only to the extent of satisfying itself about the compliance of the requirements of Section 30(2).
Conclusion
The Court enunciated, “If the finality and binding force is not provided to the votes cast by the Authorized Representatives of a class of Financial Creditors, a plan of resolution involving large number of parties may never fructify. In the instant case, the vote cast by the Authorized Representative - M/s. Catalyst Trusteeship on behalf of the class of Financial Creditors he represented, was binding on the 63 Moons and other Appellants before the NCLAT, and therefore they were estopped from raising any objection before the NCLT or NCLAT against the RP approved by the requisite majority of CoC.”
The Court was of the opinion that when Section 26 specifically states that the filing of an Avoidance Application under Section 25(2)(j) by the Resolution Professional shall not affect the proceedings of CIRP, and when the Regulation 37(a) of the CIRP Regulations 2016 also permits a provision to be made in the RP for transfer of all or part of the assets of Corporate Debtor to one or more persons, the reference of Regulation 37A of Liquidation Process Regulations in the impugned Order was unwarranted and ex-facie fallacious.
“… 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”, it further reiterated.
The Court held that the NCLAT 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.
“… the NCLT shall decide each of the Applications filed by the Administrator and pending before it after considering the relevant provisions applicable to such Applications, and shall pass the orders accordingly in terms of the provisions contained in Sections 44, 48, 49 and 51 falling under Chapter III and in terms of provisions contained in Section 66 falling under Chapter VI, as the case may be”, it also directed.
Accordingly, the Apex Court disposed of the Appeals, set aside the NCLAT’s Judgment, and directed the NCLT to decide the Avoidance Applications.
Cause Title- Piramal Capital and Housing Finance Limited v. 63 Moons Technologies Limited & Others (Neutral Citation: 2025 INSC 421)