Home / Markets / Mark To Market /  NCLT has set a dangerous precedent in the DHFL case

Should an insolvency court be worried about the commercial considerations in the resolution of an insolvency case or leave that to the stakeholders? While this could be a rhetorical question, the National Company Law Tribunal (NCLT) did not think so, and risked setting a dangerous precedent under the Insolvency and Bankruptcy Code (IBC).

In case of the bankrupt Dewan Housing Finance Corp. Ltd (DHFL), the NCLT decided that creditors must give erstwhile promoter Kapil Wadhawan, accused of fraud involving the firm, a chance to present his proposal of settlement.

The National Company Law Appellate Tribunal (NCLAT) stayed the order of the NCLT on Tuesday, and will hear the matter on 25 June. But some damage seems to have already been done by the NCLT. 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, according to media reports.

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Satish Kumar/Mint

This dilutes the IBC’s section 29A that prevents promoters from taking back their companies after having run them aground.

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. Wadhawan has offered to repay the entire 91,000 crore over a period of seven-eight years and said that all stakeholders will be fully compensated. Piramal, on the other hand, has agreed to pay roughly 37,000 crore for the firm on the rationale that it is the fair value of the enterprise arrived at after scrutinizing its books. Ergo, deep haircuts will be taken by all financial creditors.

But commercial decisions cannot be divorced from reality. It should be noted that Wadhawan is in prison for financial wrongdoings involving DHFL. Forensic audits have found large gaps in the balance sheet of the firm. Further, both the administrator and creditors believe that Wadhawan’s offer of selling his assets for the settlement could be misleading.

The administrator has pointed out that his assets are encumbered and their valuation is debatable. “The NCLT’s move is frivolous at best," said an insolvency law consultant, requesting anonymity. “There is no proof whether the promoter’s proposal is backed by financials. Asking creditors to hear out a promoter accused of fraud, based simply on his financial claims is wasting time," said another consultant on bankruptcy, also seeking anonymity.

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.

Needless to say, the most vulnerable of the creditors, the retail depositors, suffer due to such delays. DHFL owes 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.

While it is unfortunate that the committee of creditors did not push for a better deal for depositors, that is not reason enough to entertain errant promoters. 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.

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