Unnecessary deviation

DHFL should not go back to its erstwhile promoter

The National Company Law Tribunal’s (NCLT’s) direction to the lenders of Dewan Housing Finance Corp Ltd (DHFL) to consider the offer made by former promoter Kapil Wadhawan is devoid of logic. The unexpected turn came months after both the Committee of Creditors (CoC) and the Reserve Bank of India (RBI) approved the Piramal group’s proposal to acquire DHFL. Mr Wadhawan, who is now in prison on charges of money laundering and diverting bank funds, had earlier offered to pay the total outstanding principal worth Rs 91,158 crore to the creditors over a period of time. According to the Piramal group’s plan, the lenders would recover about Rs 35,250 crore. On the face of it, Mr Wadhawan’s offer would seem more attractive. However, there are multiple reasons why the lenders and the banking regulator should stand firm on the issue.

DHFL was referred to the NCLT in November 2019 after it failed to service its debt. Subsequent investigations revealed a gap worth about Rs 15,000 crore on its books. Despite Mr Wadhawan’s offer, the lenders chose to opt for the Piramal group after an intense bidding war with three other entities. Given this background, the NCLT should have rejected the erstwhile promoter’s plea and avoided an unnecessary delay in the final resolution. Section 29A of the Insolvency and Bankruptcy Code (IBC) anyway prohibits the erstwhile promoters from participating in the resolution process. This was the same reason given by the Ahmedabad Bench of the NCLT while rejecting the settlement offer made by Essar Steel’s promoters, the Ruia family. The ruling had paved the way for the takeover of the firm by ArcelorMittal. The Companies Act does enable promoters to make compromise arrangements with creditors but it will require withdrawal of the resolution process. There is no reason why this path should be pursued in this case. Besides, DHFL was referred to the NCLT by the RBI and it would need to consider the wider consequences of delays and reversal of the resolution process.

The idea of giving the company back to a person accused of financial misconduct should be immediately rejected. This can permanently damage the IBC process. The provisions of the company law may perhaps only be used in exceptional circumstances to avoid liquidation. Firms can default despite the promoters’ best intentions. In fact, if the lenders are willing to engage with the promoters under the given regulations, moving to the NCLT itself can be avoided. But such conditions don’t apply to DHFL. The RBI will certainly not want to give an impression that it is possible to defraud banks and regain control of defaulting non-banking financial companies as this can also pose risks to financial stability. Similarly, the CoC would not want to encourage something against their long-term interests. They should proceed with the existing resolution plan. If it is not accepted by the NCLT, the CoC should approach the appellate tribunal.

In this context, the Supreme Court has said in the past that commercial decisions of the CoC should not be interfered with. The IBC is one of the biggest reforms of recent years. It is expected to resolve stressed assets, which will boost overall productivity and improve the credit culture. However, delays in resolution can defeat the purpose. Thus, it is important for all stakeholders to make sure that the process is not unnecessarily delayed. This diversion in the DHFL case should have been avoided.