DHFL Insolvency: Why NCLT Asked Wadhawan’s Offer To Be Put To Vote

Wadhawan’s settlement offer for DHFL must be considered by creditors before being dismissed, says NCLT.

DHFL image used for representational purpose (Source: BloombergQuint)
DHFL image used for representational purpose (Source: BloombergQuint)

The National Company Law Tribunal ordered financial creditors of Dewan Housing Finance Corporation Ltd. to consider a settlement offer by its promoter, as the tribunal said the adequate procedure was not followed.

According to a copy of the order, which has been reviewed by BloombergQuint, the tribunal has asked the committee of creditors to put up the offer for “consideration, decision and voting” within 10 days. “...we direct the administrator to place the second settlement proposal of the applicant before CoC for its consideration, decision, voting and inform the outcome of the same to this bench within 10 days from the date of order,” the NCLT said.

According to the tribunal’s findings, Kapil Wadhawan’s settlement offer was responded to by AZB Partners, the legal representative of DHFL’s administrator. The reply by the law firm was communicated without knowledge or approval from the administrator of the financial creditors and thus cannot be considered as a reply by the appropriate authority.

“The submissions by the administrator, CoC that his settlement proposal has been placed on the website, virtual data room (VDR) is not akin to placing for consideration, voting of CoC rather its just an information and treated casually,” the NCLT said.

According to the tribunal, since the settlement offer proposed to pay over Rs 91,000 crore to the financial creditors, which is higher than the Rs 37,250-crore offer by winning bidder Piramal Group, the financial creditors must duly consider the proposal.

Ultimately, the settlement would benefit majorly the financial creditors, which includes banks and financial institutions, and thousands of small investors. Moreover, the money lent by the banks to DHFL is also public money and therefore the proposal needs due consideration in view of the quantum of money offered by Wadhawan, the NCLT said.

Further, the tribunal found that the settlement offer was not made available to fixed depositors and holders of non-convertible debentures of DHFL, who constituted 65% of the vote share of the committee of creditors.

“We have not made any comments, expressed our opinion on the feasibility, viability of the settlement proposal of the applicant Mr. Kapil Wadhwan,” the tribunal said in its order.

The promoter has offered to repay Rs 91,158 crore worth dues to all the stakeholders of DHFL, in his settlement proposal. The offer includes Rs 9,062 crore on DHFL’s balance sheet to be used for upfront payments to small investors, NCD holders and fixed depositors of the company.

Wadhawan had written to the creditors of DHFL in October, November and December of 2020, offering to settle dues in full.

During their arguments, the creditors and the administrator had stated that Wadhawan, being the promoter of DHFL and the reason behind the company’s financial health, did not have the right to offer any resolution.

The tribunal said while promoters are barred from submitting a resolution plan under the Section 29A of the IBC, Wadhawan had submitted a one-time settlement offer and there is no express legal bar against such a submission.

“...if we accept these contentions of the respondent, settlement proposal, one-time settlement proposal cannot be offered by the promoters and cannot be accepted by banks, financial institutions, creditors which is a generally prevailing practice and not an acceptable proposition,” the NCLT said, responding to the arguments.

On the offer by Piramal Group which was accepted by the committee of creditors with majority, the NCLT said it is aware that the resolution process has reached advanced stages. However, since the resolution plan is facing multiple applications against it, filed by various stakeholders, it would take some time before the plan is approved for implementation.

“Adjudicating authority in the meanwhile directs the administrator to place the 2nd settlement proposal before the CoC for its consideration, decision, voting as a simultaneous process without losing time,” the NCLT said.

But according to a senior lawyer familiar with the matter, the order is likely to be challenged in the National Company Law Appellate Tribunal.

A former official of State Bank of India, who was part of the CoC, said Wadhawan’s letter was discussed in meetings, however, since it was merely a letter and not an actual offer, the lenders did not do a formal assessment. In any case, banks are not allowed to engage in deals with promoters where banks have found fraudulent transactions, the banker said on the condition of anonymity.

The Reserve Bank of India’s guidelines for one-time settlement offers, issued in September 2005, state that public sector banks cannot settle dues with companies which are classified as wilful default, fraud or malfeasance. “Banks shall identify cases of wilful default, fraud and malfeasance and initiate prompt action,” the RBI had said in its guidelines.

Even if Wadhawan was to come back, it is unclear how he would be able to run the company, since he is currently in jail, the banker quoted above said.

Lenders had classified DHFL as a case of fraud in 2020, owing to certain illegal transactions by the promoter group. The Central Bureau of Investigation and the Enforcement Directorate are investigating Wadhawan and his dealings in DHFL under a case of alleged money laundering.

BloombergQuint spoke with Supreme Court Senior Advocate AS Chandhiok and Bombay High Court Advocate on NCLT’s findings.