DHFL’s Resolution Process – Recent Developments

Supreme Court’s order on personal guarantees

 In May 2021, the Supreme Court's approval of invoking defaulting promoters' personal guarantees closes a
key gap in bankruptcy law, increasing the odds of recovery and acting as a strong disincentive to default
bankers.

 The court appears to have enabled creditors to recoup residual debts from personal guarantors even
after the corporate debtor's insolvency was resolved.

 Lenders may also be able to pursue promoters who have failed on their guarantees directly in bankruptcy
court. This is a big legal development.

 The court’s order clears the way for banks to attach personal assets of Reliance Group's Anil Ambani,
Dewan Housing Finance Ltd's Kapil Wadhawan, Videocon Group's Venugopal Dhoot and Bhushan Power
& Steel's Sanjay Singal among others.

NCLT’s intervention (May 19th 2021)

 On February 18, 2021, the RBI gave its seal of approval to the decision. The central bank's nominated
administrator filed an application with the Mumbai National Company Law Tribunal to get the resolution
approved.

 After DHFL's lenders filed a takeover attempt and voted in favor of conglomerate Piramal Group, the NCLT in
Mumbai, on May 19th, asked the COC to convene within 10 days to hear Kapil Wadhawan's suggestion
and cast vote on it.

Wadhwan’s Proposal

Kapil Wadhawan has proposed paying all of DHFL's creditors, including non-convertible debenture and fixed deposit
holders, 100 percent of their money over a period of specified time. The plan is as follows:

 Upfront payment of Rs 9,000 crore to creditors in a revised plan of Rs 91,158 crore.

 Offered to service Rs 31,000 crore debt in 7 years at 8.5% per annum.

 Apart from that, he has offered to repay Rs 12,000 crore within a period of 7 years at 11.5% per annum,
following a one-year moratorium.

 The plan also includes repayment of Rs 18,000 crore in 5 years at 11% per annum, following a 5-year
moratorium.

 Rs 5,000 crore will be converted to equity.

 Rs 16,158 crore will be converted into zero coupon bonds.

COC’s decision

 Banks believed that the proposal was not in compliance with the requirements of an application under
Section 12A of the Insolvency & Bankruptcy Code (IBC) which gives the debtor another chance to make
good on the default.

 Also, the banks had reasons to turn it down like the promoter's style of governance, past track records
and ongoing criminal investigation in regards to conducting the affairs of DHFL.

CoC’s appeal at the NCLAT

 R Subramaniakumar, the administrator, appealed the NCLT judgement requiring lenders to accept
Wadhawan's settlement offer to the National Company Law Appellate Tribunal (NCLAT).

 On behalf of the Committee of Creditors, Union Bank of India filed an appeal at the NCLAT against the
May 19 ruling (CoC).

The appeal said, “The Adjudicating Authority (NCLT), in passing the Impugned Order, has overlooked relevant facts
and settled law, ignoring the submissions and contentions of not only the Appellant (Administrator) and the CoC, but
also the RBI. The order is incorrectly failing to recognize any legal basis, either under Section 29A or Section
12A, which underlay the Second Proposal (Wadhawan’s settlement offer dated December 29, 2020), instead
choosing to simply accept Respondent 1’s (Kapil Wadhawan) baseless statement that this was a “precursor” to a
settlement proposal under Section 12A of the Code: a concept not recognized under any provision of law.”

Wadhawan's offer were to be evaluated under Section 12A of the IBC, it would necessitate the following:

(1) RBI, which launched the CIRP after overriding DHFL's Board, would have to justify the withdrawal, given that it
occurred after the EoI invitation.

(2) The RBI would need to get a bank guarantee for the stipulated expenditure in favour of Kapil Wadhawan's
proposal

(3) the CoC would need to adopt the plan by a 90 percent margin; and only then would the RBI approach the NCLT.

“There is no provision in law or more specifically under the Code which permits passing of such orders.
Further, that the Impugned Orders have been passed contrary to the express provisions of the Code inter alia under
Section 12A of the Code ("Section 12A") and Regulation 30A ("Regulation 30A") of the Insolvency and Bankruptcy
Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 ("CIRP Regulations"),” the
CoC said in its appeal.

Section 29 A of IBC

Persons not eligible to be resolution applicant: A person shall not be eligible to submit a resolution plan, if such
person, or any other person acting jointly or in concert with such person:

a) is an undischarged insolvent;
 b) is a willful defaulter in accordance with the guidelines of the Reserve Bank of India issued under the Banking
Regulation Act, 1949 (10 of 1949);

c) at the time of submission of the resolution plan has an account, or an account of a corporate debtor under the
management or control of such person or of whom such person is a promoter, classified as non-performing asset
in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949
(10 of 1949) or the guidelines of a financial sector regulator.

NCLAT decision (May 25th 2021)

 The National Company Law Appellate Tribunal (NCLAT) stayed the order of the Mumbai Bench of the
NCLT and said the pendency of the appeal would not come in the way of the NCLT deciding on the
approval for Piramal’s bid for DHFL.

 The matter would be heard further on June 25, 2021 .

Wadhwan’s appeal to the Supreme Court (June 1st 2021)

 Wadhawan has filed an appeal with the Supreme Court, appealing the ruling of the NCLAT, which stayed
the Mumbai Tribunal's decision to evaluate the former promoter's rehabilitation plan.

 The Supreme Court is yet to schedule a hearing on the case.

References:

1) https://www.moneycontrol.com/news/business/dhfl-case-nclat-stays-nclt-order-directing-coc-to-consider-kapil-
wadhwans-proposal-6935571.html

2) https://www.bloombergquint.com/business/piramal-wins-bid-for-dhfl

3) https://www.moneycontrol.com/news/business/dhfl-administrator-moves-tribunal-challenging-nclt-order-on-
wadhawan-offer-lenders-may-follow-suit-6931681.html

4) https://www.thehindubusinessline.com/money-and-banking/piramal-wins-race-to-acquire-
dhfl/article33582776.ece

5) https://economictimes.indiatimes.com/industry/banking/finance/banking/supreme-courts-order-on-defaulter-
tycoons-plugs-an-important-bankruptcy-loophole/articleshow/82825203.cms

6) https://economictimes.indiatimes.com/markets/stocks/news/nclt-ruling-on-dhfl-creditors-weighing-
options/articleshow/82897352.cms

7) https://www.financialexpress.com/industry/kapil-wadhawan-sends-fresh-proposal-to-dhfl-lenders/2161082/

8) https://www.cnbctv18.com/legal/dhfl-case-administrator-files-appeal-in-nclat-against-nclt-order-to-consider-
wadhawans-settlement-offer-9411121.htm

9) https://www.bloombergquint.com/law-and-policy/dhfl-insolvency-nclat-stays-order-directing-vote-on-promoter-
offer-2