The NCLT decision in DHFL case surprised everyone

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  The NCLT decision in DHFL case surprised everyone

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Read more on - Polity | Economy | Schemes | S&T | Environment

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• The story: India's IBC law 2016 is a milestone in the economic history of the nation, as it brought a clear framework for resolving bad assets, without allowing undue leeway to the promoters. But over the years, interesting situations have emerged.
• The 2021 DHFL case: In case of the bankrupt Dewan Housing Finance Corp. Ltd (DHFL), the National Company Law Tribunal (NCLT) decided that creditors must give erstwhile promoter Kapil Wadhawan, accused of fraud involving the firm, a chance to present his proposal of settlement.

1. Should an insolvency court be worried about the commercial considerations in the resolution of an insolvency case or leave that to the stakeholders? The NCLT clearly risked setting a dangerous precedent under the Insolvency and Bankruptcy Code (IBC).
2. The National Company Law Appellate Tribunal (NCLAT) stayed the order of the NCLT and was set to hear the matter later. But damage seems to have already been done by the NCLT. 
3. The order may encourage more errant promoters to seek a way to get back their business they ran aground for a cheaper price through settlement offers. The order has triggered a similar settlement offer from Jaypee Infratech promoter Manoj Gaur.
4. This dilutes the IBC’s section 29A that prevents promoters from taking back their companies after having run them aground.

• Why take offer from Wadhawan: The premise of supporting an offer from Wadhawan was that it’s commercially more acceptable than that of the winning bid from Piramal Enterprises Ltd. Mr. Wadhawan offered to repay the entire Rs.91,000 crore over a period of seven-eight years and said that all stakeholders will be fully compensated. Piramal agreed to pay roughly Rs.37,000 crore for the firm on the rationale that it is the fair value of the enterprise arrived at after scrutinizing its books. So deep haircuts will be taken by all financial creditors.
• Purely commercial or moral or both: But commercial decisions cannot be divorced from reality. Mr. Wadhawan is in prison for financial wrongdoings involving DHFL. Forensic audits found large gaps in the balance sheet of the firm. Both the administrator and creditors believe that Wadhawan’s offer of selling his assets for the settlement could be misleading.

1. The administrator pointed out that his assets are encumbered and their valuation is debatable. 
2. Experts also said that they found the NCLT’s move frivolous at best!
3. Why so? Asking creditors to hear out a promoter accused of fraud, based simply on his financial claims is wasting time.

• Depositors paying the price: India’s courts have seldom thrashed out a resolution in record time, especially those dealing with staid corporate matters. The IBC was bound to be litigated heavily for the code to emerge a stronger version of itself. Delays were inevitable and DHFL’s resolution has stretched for over 19 months now. The most vulnerable of the creditors, the retail depositors, suffer due to such delays. DHFL owes Rs.5,300 crore to depositors. It should be noted that depositors had opposed Piramal’s resolution plan considering the deep losses they will have to incur on their investments.
• Summary: The court (NCLT) got it wrong this time. While the committee of creditors (COC) did not push for a better deal for depositors, a very sad situation, that cannot mean that errant promoters are entertained. Piramal’s plan has been stamped by the Reserve Bank of India (RBI) and the Competition Commission of India (CCI) for its commercial value. The courts need not interfere.

Read more on - Polity | Economy | Schemes | S&T | Environment

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