Inclusion of Financial Service Providers under IBC Modified Rules
The Insolvency Code generally doesn’t include within its ambit the dealings of the Financial Sector Providers (FSP). However the collapse of Dewan Housing Finance Corp triggered the Insolvency Bankruptcy Code; vide Central government orders 2019 attracting the provisions under Section 227 of the Code. The liquidity crunch caused by the banking institutes distressed many Non-Banking Financial Companies (NBFC) barricading their finances, deposit amounts and sanctioned loans. The plethora of rising insolvency concerns, urged the need for a structured resolution mechanism for resolving the solvency disputes of FSP. The article critically examines the judgment and the third party assets in relation to the FSP Rules.
In the absence of notification (2019), on 30th September 2019 a single bench of Bombay High Court comprising Justice A.K. Menon passed an temporary injunction refraining DHFL from making any further payments or disbursements to their secured or unsecured creditors, except in case were the payments have been made on pro-rata basis to secured creditors. Aggrieved by the same, various banks across filed an interim application seeking to intervene the order passed with certain modifications. In a commercial suit before the same bench, the court modified the previous order dated 10th October 2019 (Supra) approving the payments to banks, loan assignees to the extent of their executions under the Assignment Agreement.
Erstwhile the FSP rules incorporated with the Indian Financial Code (IFC), has empowered RBI and the Central Bank to initiate the Corporate Insolvency Resolution Process (CIRP) against DHFL under section 227 of the code read with Section 239 (2) (zk) of the Insolvency Bankruptcy Code (IBC) 2016, read with 5 and 6 of the IBC (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules 2019. Upon the application, the paramount issue before the NCLT was executing the powers enshrined by the Ministry of Corporate Affairs vide its notification on 15th November 2019. In the absence of the notification dated 30th January 2020, the adjudicating authority had to decide on the matters related to “Third Party Asset” in possession of FSP. Subsequently the Central Government supressed DHFL Board of Directors citing “Inadequacy of governance” and appointed the “Administrator” to take over the control of Corporate Debtors business (DHFL)
Meanwhile, Kapil Wadhawan’s (Promoter) proposal to repay the principal amount of Rs 91,158 crores in full by the way of upfront cash plunged the NCLT to diverge its opinion, directing the Committee of Creditors (CoC) to reconsider the offer. Challenging the NCLT orders, CoC and the Piramal group (Highest bidder) filed a separate application before the NCLAT. The Appellant Tribunal placing a stay on the NCLT order opined that the stay order passed should not hijack the NCLT approving the resolution plan by CoC.
Current Bidding Bits
On 7th June 2021 the NCLT approved Piramal groups resolution plan for its highest offering of upfront cash, in spite Oaktree’s bid for DHFL at 38, 400. The Piramal group offered a settlement of 37,250 crores to all the creditors by the way of Rs 12,700 crores in upfront cash and the remaining amount by the issue of non-convertible debentures. Interestingly, DHFL defaulted in total a payment of Rs 1, 571 with regard to issuance of bonds and other related interests which are as thrice as the amount agreed for settlement.
Third Party assets
The initiation of CIRP sets forth the duty of the “Administrator” (replacing the resolution professional in NBFC matters) to take control over the assets of the Non-Banking financial sectors. The administrator shall prepare a final statement regarding the assets held by the company and contact the respective agents holding benefit in the company. Amidst the recovery proceedings any third party assets held by NBFC under a contractual obligation, shall be excluded from the company’s net worth so as to safeguard the third party interests. Upon the commencement of the insolvency proceedings, the administrator under section 227 shall deal with the assets, finances and other properties in the manner specified by the Central Government. Highlighting Rule 10 of the code, the moratorium period shall not apply to the third party assets in custody or possession of FSP. Thereby, all the benefits received from the assigned assets shall be diverted into a separate fund account, as per the contractual terms agreed between NBFC and the third party. The diversion of funds is to avoid the collusion of companies’ assets with other during the liquidation process. The rule however fails to provide an authoritative view on how actually it will protect the third party rights.
While on the commencement of CIRP, any assets owned by or under the custody of the third party shall be transferred back as per contractual obligation to the Administrator (on behalf of DHFL). In the absence of notification, the Administrator shall not deal with the third party assets on its own interest as those are subject to regular governance under the FSP provisions. While with regard to the dealings of the third party assets the notification still remains awaited.
The default by NBFC sectors has created a lot of turbulence in the lending industry. DHFL being the first non-banking financial company facing liquidation process has raised many quintessential questions, left unuttered by the notification. The notification however has provided a vague idea of settlement transactions related to FD’s, hire purchases and the other management funds. Although the notification highlights the key aspects of the administrator and its management, but it lacks on providing a clarity check on how these funds shall be prioritized and allocated. Before retrieving the third party assets is it necessary that these creditors, deposit holders are categorized in order of preference so as to disburse their funds accordingly. In the absence of specification provided by the notification it is difficult to estimate on how the administrator shall protect the interest of the third party in relation to the company’s affairs. However the moratorium period not being applicable to the third party asset in possession or custody of FSP has been a sigh of relief to these dealers. On the other end, the notification is also hushed on the FSP contracts with the outsider on the third party assets.
The NCLT further in, Infrastructure Leasing and Financial Services Ltd stated “In particular, inherent powers do not allow a court / tribunal to take away substantive rights of third parties and/ or nullify or stultify a statutory provision” (emphasis added).
The NCLT erred in advocating Wadhawan’s proposal to CoC, being a promoter he would fall within the purview of “Related Party” necessarily defeating the provisions of IBC, which if considered, would have submerged a feasible resolution plan. It is therefore necessary to have a codified insolvency structure so as to disassociate the claims raised by the members falling within section 5(24).
The conclusive statement of DHFL insolvency is that the Piramal group shall inundate a whopping 1 crore equity share into DHFL, delisting them from both the exchanges. The NCLT added “While granting NoC by RBI, the status of the Corporate Debtor (DHFL) is changed from Deposit-taking Housing Finance Company to Non-Deposit taking Housing Finance Company” (Emphasis added). Through the reserve merge mechanism with DHFL, the Piramal group is expected to improve its credit profile by 6.57% of funds through other banks. Erstwhile, a group of retail investors have moved their application to the Supreme Court accusing NCLT and SEBI, of failing to inform the delisting of DHFL which is now a part of the Piramal groups.