TMI Blog2022 (2) TMI 1414X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, as the case may be, mandate the total payment to the Fixed Deposit Holders even though the corporate debtor is undergoing CIRP under the I B Code, 2016? III. Whether section 238 of the Insolvency and Bankruptcy Code, 2016, overrides the RBI Act and NHB Act? Is the approved Resolution Plan stipulates extinguishment of the claims to the Fixed Deposits without discharging their payments in full, valid and legal in terms of the Code? IV. Whether the transactions involving repayment to Fixed Deposits Upon maturity of their deposit would fall within the ordinary course of business for Respondent No. 1, as specified under section 28(1)(k) of the Code? V. Whether Respondent No. 1 is legally authorised for disbursing loans and investments despite its failure to repay Fixed Deposit holders as per the terms of their deposits? VI. Whether any payment made against the F.D.'s in terms of their deposits during CIRP would be categorised as a preferential transaction? HELD THAT:- It is essential to point out that the issues raised in the present Appeal were also raised in the Company Appeals VINAY KUMAR MITTAL, RASHMI SHRIVASTAVA, JESUIT RESEARCH AND DEVELOPMENT S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21 which gives them the biggest haircut despite being the most vulnerable class. The Appellants have been recognised as Financial Creditors and equated on their risk appetite with Financial Institutions and Banks purely arbitrarily. The Appellants are aggrieved by the blatant abusive treatment being meted out to them under the garb of 'commercial wisdom of the CoC'. Factual Background 2. The present Appeal impugns Order dated 7-6-2021, passed by the National Company Law Tribunal, Mumbai Bench, disposing of I.A. No. 625/2021 preferred in C.P. (I.B.)/4258/(M.B.)/C-11/2019. 3. The I.A. No. 625/2021 was preferred by the Appellants under section 60(5) of the I.B. Code seeking, inter alia, a declaration that the Resolution Plan be declared illegal and violative of the provisions of the I.B. Code, or strictly in the alternative, a direction seeking modification of the Resolution Plan such that the Appellants herein are refunded their Fixed Deposits along with interest in terms of the provisions of the NHB Act pertinently, in I.A. No. 449/2021, which Mr. R. Subramaniakumar preferred. 4. DHFL had offered a fixed deposit scheme, which promised high returns and security ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l cover for public deposits has been mandated under the NHB Directions, 2010. (iii) A perusal of the statement of objects of the NHB Act makes it amply clear that it is aimed at regulating and promoting housing finance institutions. Whereas the I.B. Code is aimed at Insolvency Resolution of Corporate Persons. It is one thing to suggest that the insolvency of the corporate debtor will be governed under the provisions of the I.B. Code. Still, wholly another to indicate that in the exercise of such powers, the CoC constituted under the I.B. Code will also usurp a Statutory Authority's regulatory functions and powers by resorting to section 238. A ready resort to section 238 should not render section 30(2)(e) nugatory. Section 238 covers cases of inconsistency, whereas the present case is one where the two legislations can be construed harmoniously. Since the NHB Act provides for the regulation of public deposits in a Housing Finance Company, it must be done strictly according to the terms thereof or not at all. Municipal Corporation of Greater Mumbai (MCGM) v. Abhilash Lal (2020)13 SCC 234. (iv) Section 36 of the NHB Act provides that the provisions thereof shall have effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ein the Hon'ble Apex Court expressed hopes of redressal of the concerns of the depositors and their rights by law. In terms of the same, the present claims must be considered by the provisions of the NHB Act read with the Directions. (c) The Corporate Debtor being a Financial Service Provider must be treated on a different footing from a regular Corporate Debtor. (i) The legislature, in its wisdom, notified the provisions for insolvency resolution of FSPs separately and distinctly from the insolvency of a regular Corporate Debtor. The sub-committee report on the insolvency of FSPs provides that the rationale for excluding FSPs from the purview of IBC is that the financial firms differ from other firms, among other things, because they handle large amounts of consumers money. Therefore, they are considered systemically important as their failure might disrupt the financial system. The sub-committee also noted that the HFCs must comply with the directions and instructions issued by the National Housing Bank. [Relevant excerpts of the Report of the Sub-Committee of the Insolvency Law Committee for Notification of Financial Service Providers under section 227 of the IBC, 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by Prospective Resolution Applicants concluded on January 15, 2021. On January 15, 2021, the resolution plan of the Successful Resolution Applicant, i.e. Piramal Capital Housing Finance Limited ( Respondent No. 3/Piramal ), was approved by the Committee of Creditors ( CoC ) with 93.65% votes cast in its favour. Additionally, the distribution of proceeds was also put to the vote before the CoC, which the CoC approved by 86.95% majority voting in favour of the.(sic) On January 25, 2021, the Administrator filed an application with RBI seeking no-objection concerning the Successful Resolution Applicant as required under rule 5(d) of the FSP Rules. On February 16, 2021, RBI granted its no-objection in terms of rule 5(d)(iii) of the FSP Rules. On February 24, 2021, an application seeking approval of the Resolution Plan was filed under section 31 of IBC before the NCLT. The NCLT heard objections raised by various stakeholders, including the public deposit holders, to the resolution plan and, by its Order dated June 7, 2021, approved the Resolution Plan submitted by Respondent No. 6 (Para 12, Pgs. 4-5, Reply). As per the directions by NCLT in its Order dated June 7, 2021, the Administr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Financial Creditors after considering the 'feasibility and viability of such Resolution Plan and other requirements as may be prescribed under IBC and regulations framed thereunder. Such evaluation considers all aspects of the plan, including distributing funds among various creditors. It is submitted that having participated in the CIRP, the Appellants cannot challenge the decision of CoC to approve the Resolution Plan, which is otherwise in compliance with the provisions of the IBC. In light of the Hon'ble Supreme Court's decision in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta [2019] 111 taxmann. com 234 it is unequivocally clear that the CoC members have the important task of not only running the resolution process but also working towards maximisation of value [Swiss Ribbons (Paras 26, 27 and 28)] of the Corporate Debtor for all stakeholders (not fixed deposit holders alone) and providing for the manner of distribution of funds as obtained by way of a Resolution Plan. By seeking payments outside the resolution process, the Appellants who also are CoC members (other CoC members being banks etc.), are acting in a silo for obtaining funds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erential payment being made to a particular class of Financial Creditors, whether secured or unsecured [Para 46, Pgs. 15-16, Reply). It is submitted that once the moratorium is in force as in the present case (on November 29, 2019), it is not open for any Financial Creditor to recover any amount from the account of the Corporate Debtor, nor is it an appropriate amount towards its dues. The aforesaid has been held by this Appellate Tribunal in Indian Overseas Bank v. Dinkar T. Venkatsubramaniam [2017] 88 taxmann.com 132/[2018] 145 SCL 138 (Para 5). The CoC comprises Financial Creditors, which includes both secured and unsecured creditors. The payment to any creditors for pre-resolution claims will be a preference of only a segment of Financial Creditors over other similarly situated creditors or secured creditors and amount to an abuse of the process statutorily set out in the IBC. There is no mechanism for payments during CIRP to a segment of Financial Creditors (with admitted claims in the resolution process) to prefer a payment outside the IBC. The Hon'ble Supreme Court in the case of. Committee of Creditors Essar Steel India Ltd. (supra), has held that ......equality pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e code in itself and exhaustively deals with the rights of all stakeholders [Para 27, Pg. 9, Reply). The Hon'ble Supreme Court in the case of Embassy Property Developments (P.) Ltd. v. State of Karnataka [2019] 112 taxmann.com 56/[2020] 157 SCL 445 (Para II) has held that IBC is a unified umbrella Code, covering the entire gamut of the law relating to insolvency resolution of corporate entities in a time-bound manner. On a combined reading of the FSP Rules read with the provisions of IBC and the various judgments as relied upon hereinabove, it is clear that IBC provides for a detailed mechanism where under the claims of the fixed deposit holders, including the Appellants, have been sufficiently dealt with. IBC provides for the mechanism through which the interest of the fixed deposit holders as a class of creditors, including the Appellants, is represented and protected in the CIRP and has been found to be adequate and valid in law Pioneer Urban Land Infrastructure Ltd. v. Union of India [2019] 108 taxmann.com 147/155 SCL 622 (Paras 49, 65). Therefore, it is submitted that the claims of the Appellants must be considered only in terms of the statutory mechanism under IBC and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the scheme of the IBC is not permissible and expressly barred as per the provisions of IBC. 23. It is submitted that neither the RBI Act nor the NHB Act gives any right to the depositors to be paid in full in case of insolvency. The RBI Act and the NHB Act merely provide that the license of an HFC or NBFC may be cancelled if the deposit holders are not paid. However, neither enactment mandates that full payment be made to deposit holders, especially when NBFC or HFC is under insolvency. 24. Section 238 of IBC gives IBC overriding effect over other enactments. Therefore, IBC being a later enactment and a special statute, and in view of section 238 of IBC, shall prevail over RBI Act (including Chapter III-B section 45Q) and NHB Act (Para 49, Pg. 16, Reply). 25. It is also submitted herein that the fixed deposit holders (including the Appellants) are secured Financial Creditors whose rights are secured to the extent of floating charge created over assets in terms of the circular issued by National Housing Bank dated November 27, 2006. The floating charge was created over the assets of the DHFL in terms of section 29B of the NHB Act and the circulars therein for an amount a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BI Act (i) No full payment right exists under the NHB Act, the RBI Act, or other legislation. Moreover, any such right, even if it exists, would be wholly repugnant with provisions of the Code which provides for a specific manner and priority of payment and sets out the right and extent to which a creditor is mandatorily required to be paid in a resolution plan, i.e. the liquidation value. (ii) There cannot be any harmonious construction of the statutes in case of direct repugnancy and inconsistency. Accordingly, in such cases, section 238 of the Code would apply. (iii) It is well-established that when two special statutes contain non-obstante clauses, the later statute (being the Code in this case) will prevail over the earlier statute (NHB Act/RBI Act). (iv) Further, it has been held by the Hon'ble Supreme Court in numerous judgments that in case of any inconsistency between the provisions of the Code and any other enactment, the provisions of the Code will prevail. (v) Thus, the provisions of the Code will override the NHB Act or the RBI Act, and no preferential treatment can be granted to the Appellants in the CIRP of DHFL based on these enactments. C. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of the law. (iv) Further, in the 6th CoC Meeting held on July 29, 2020, upon request by A.R. for payment of dues, the Administrator again expressed his inability given that deviation from the applicable rules and regulations of the Code would result in non-compliance. (v) The same stand was also taken by the Administrator in his letter dated February 13, 2020, to the Authorised Representative. Further, by its Order dated January 31, 2020, the Hon'ble Supreme Court has also categorically held that the rights of F.D. Holders must be decided in accordance with the law. (vi) It is a well-established principle of law Chitra Sharma (supra) (paragraphs 48.1 and 48.2) that the Code prohibits repayment of one class of creditors in preference to other creditors during CIRP. Hence, if the submissions of the Appellant are accepted, it would amount to giving priority to one class of creditors during CIRP, which is against the provisions of the Code. E. The Appellants have no basis in law to seek priority payment and have sought to base their case on equity. (i) No legal provision has been cited by the Appellants to establish a right to priority payment of dues, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks who are custodians of public money. They are also similarly placed and have all been treated equally. (viii) Priority payment to the Appellants on the grounds of equity alone would be discriminatory and gravely prejudicial to the other similarly placed creditors of DHFL and would result in the breakdown of the entire CIRP, which is directly contrary to the objectives of the Code. F. Sections 14, 20 and 25 of the Code have to be read harmoniously to preserve the assets of the Corporate Debtor (i) On a harmonious reading of section 20(1) and section 25, it is transparent that the primary obligation of the resolution professional/administrator is to protect and preserve the assets of the Corporate Debtor. (ii) There is also a duty to keep the Corporate Debtor a pong concern. However, this duty does not entail an obligation to carry on the business in the same results in direct breach of section 14 of the Code sections 14, 20 and 25 of the Code need to be read harmoniously; There is no stipulation in the Code which provides that DHFL could not have offered other loans without payment to F.D. Holders. (iii) Without prejudice, loans were granted for limited amounts on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CoC and cannot be permitted to challenge the distribution mechanism before this Hon'ble Appellate Tribunal. I. The jurisdiction of the NCLT and this Appellate Tribunal is limited (i) Without prejudice to all those above, it is now a settled position of law that neither the NCLT nor this Appellate Tribunal has been endowed with the jurisdiction to reverse the commercial wisdom of the CoC on any ground, much less on the opinion of minority creditors of the CoC. [Pratap Technocrats Judgment @ paragraph 39] (ii) It is well established that the commercial wisdom of CoC is not amenable to judicial review on any grounds. [K.Shashidhar v. Indian Overseas Bank [(2019) 12 SCC 150] (paragraph 52), Kalparaj Dharamshi Anr v. Kotak Investment Advisors Ltd. (Civil Appeal No. 2943-2944 of 2020) (paragraphs 154, 155); Jaypee Kensington Boulevard Apartments Welfare Association Ors. vs NBCC (India) Ltd. Ors, 2021 SCC OnLine SC 253 (paragraph 380) (iii) The jurisdiction of this Appellate Tribunal to review the Resolution Plan is circumscribed by the Code. [Pratap Technocrats Judgment @ paragraph 31] (iv) The Resolution Plan and the distribution mechanism are in line with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity or exercise plenary powers while dealing with objections to the Resolution Plan that an overwhelming majority has approved of the CoC. [Case 2: K. Sashidhar (supra) (Paras 55-56); Case 3: Maharashtra Seamless Ltd. v. Padmanabhan Venkatesh [2020] 113 taxmann.com 421/158 SCL 567 (Para 30)]. Moreover, the treatment of recoveries arising out of avoidance applications is a matter of commercial wisdom of the CoC and ought not to be interfered with by the Ld. Tribunal or now by this Hon'ble Appellate Tribunal. [Case 4: JSW Steel Ltd. v. Mahendra Kumar Khandelwal [2020] 117 taxmann.com 624 (Paras 136-138); Annexure 1: Report of the Insolvency Law Committee dated February 2020] 2.3 Further, neither the Code nor the allied regulations make any distinction between the Corporate Insolvency Resolution Process (CIRP) of a Financial Service Provider (FSP) or a non-FSP. Even the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudication Authority) Rules, 2019 (FSP Rules), do not provide a broader extent of review of the commercial wisdom of the CoC that is required to be exercised by the Ld. Tribunal and the Hon'b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llants cannot be allowed to bypass the distribution mechanism under the Code and seek preferential treatment 5.1 F.D. holders have been recognised as financial creditors under the Code. The Appellants have also categorised themselves as financial creditors (@ Para 7.16/Pgs. 35-36 of the Appeal). Naturally, the Appellants ought to be subjected to the rights and treatment available to Financial Creditors under the Code even in insolvency involving a non-banking financial institution. [Annexure 2: Report of the Sub-Committee of the Insolvency Law Committee for Notification of Financial Service Providers under section 227 of the Code dated October 4, 2019] 5.2 Appellants, being financial creditors, cannot claim any preferential or full payment under the Code or any allied rules and regulations. No exception has been carved out for F.D. holders under the Code (that envisages a composite scheme to deal with the financial situation of the Corporate Debtor) or otherwise to claim preference or better rights to payments. Therefore, allowing a refund to one class of Financial Creditors will not be in the overall interest of the composite resolution/revival of the Corporate Debtor under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discharging their payments in full, contravenes the statutory provisions of the NHB Act and RBI Act? II. Whether the NHB Act or RBI Act, as the case may be, mandate the total payment to the Fixed Deposit Holders even though the corporate debtor is undergoing CIRP under the I B Code, 2016? III. Whether section 238 of the Insolvency and Bankruptcy Code, 2016, overrides the RBI Act and NHB Act? Is the approved Resolution Plan stipulates extinguishment of the claims to the Fixed Deposits without discharging their payments in full, valid and legal in terms of the Code? IV. Whether the transactions involving repayment to Fixed Deposits Upon maturity of their deposit would fall within the ordinary course of business for Respondent No. 1, as specified under section 28(1)(k) of the Code? V. Whether Respondent No. 1 is legally authorised for disbursing loans and investments despite its failure to repay Fixed Deposit holders as per the terms of their deposits? VI. Whether any payment made against the F.D.'s in terms of their deposits during CIRP would be categorised as a preferential transaction? 29. It is essential to point out that the issues raised in the present A ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
