Acting on a motion filed by Reliance Nippon Life Asset Management Company or RNAM (now Nippon India Asset Management Company), the Bombay High Court extended its previous stay on further payments by DHFL to its creditors except for payments made parri passu (in equal proportion) to all secured creditors. In its pleadings, RNAM contended that payments had been made to unsecured creditors such as DSP Mutual Fund in violation of the rights of secured creditors (which stand ahead in the hierarchy of creditors). The fund house also argued that further payments must be made pari passu (in equal proportion) to secured creditors first which was accepted by the High Court.
The court noted that that DHFL owes around ₹74,000 crore to secured creditors and ₹10,000 crore to unsecured creditors and thus secured creditors formed the overwhelming majority. Some of the company’s lenders led by banks signed an Inter-Creditor Agreement (ICA) which provided for conversion of debt to equity and restructuring of DHFL debt. However the Court noted that the resolution plan provides ‘no respite in the short run.’
The High Court further agreed with a number of procedural lapses highlighted by RNAM in its motion. The Court ruled that DHFL had sold loans and receivables over which its secured creditors had a charge. Hence the amount of ₹1,008 crore thus collected should be paid first to the secured creditors. It criticized the behavior of Catalyst Trusteeship, the Debenture Trustee (Defendant No 2). “No concrete action seems to have been taken by defendant no.2 till date. One would have expected a trustee to act in a spirited manner," it ruled. However the court rejected the contention that the personal assets of the promoter (Kapil Wadhawan) would be liable to be attached.
The court’s ruling on the actions of the debenture trustee in particular has raised concerns on the recovery of money owed to retail NCD holders of DHFL. For mutual fund investors, recovery increasing seems to hinge on the ability of the fund house to enforce the rights of its unit holders in court.