By Shailendra Singh & Co., Advocates
April 2, 2025
Introduction
In a landmark judgment delivered on April 1, 2025, the Supreme Court has approved the Resolution Plan proposed by Piramal Capital and Housing Finance for the erstwhile Dewan Housing Finance Corporation Ltd (DHFL). The two-judge bench comprising Justice Bela Trivedi and Justice SC Sharma set aside the National Company Law Appellate Tribunal (NCLAT) order, which had directed the creditors of DHFL to reconsider the resolution plan.
This judgment brings clarity to several critical aspects of the Insolvency and Bankruptcy Code (IBC), 2016, particularly regarding the treatment of avoidance transactions and the sanctity of the Committee of Creditors’ (CoC) commercial wisdom.
Background of the DHFL Insolvency
DHFL, once a leading housing finance company in India, was pushed into insolvency proceedings in November 2019, with outstanding debts amounting to approximately Rs. 90,000 crores. During the Corporate Insolvency Resolution Process (CIRP), the Piramal Group emerged as the successful resolution applicant with a resolution plan valued at Rs. 37,250 crores, which received overwhelming approval from the CoC with 93.65% votes in favor.
However, the process faced complications when Mr. Kapil Wadhawan, the former promoter of DHFL, submitted settlement proposals. The National Company Law Tribunal (NCLT) Mumbai directed the Administrator to place these proposals before the CoC, a move that was challenged by Union Bank of India on behalf of the CoC.
The Avoidance Transactions Controversy
A central point of contention in this case revolved around the treatment of potential recoveries from avoidance transactions worth approximately Rs. 45,000 crores. The Piramal Group’s resolution plan had assigned a nominal value of Rs. 1 to these potential recoveries.
For context, the IBC identifies four types of avoidance transactions:
- Preferential transactions
- Undervalued transactions
- Fraudulent transactions
- Extortionate credit transactions
These are transactions conducted by a corporate debtor prior to insolvency proceedings that are deemed detrimental to creditors’ interests.
The Supreme Court’s Decision
The Supreme Court’s ruling makes several significant determinations:
- Approval of Piramal’s Resolution Plan: The Court upheld the resolution plan approved by the CoC in 2021, reinforcing the sanctity of the CoC’s commercial wisdom.
- Allocation of Recoveries: The Court held that funds recovered from fraudulent transactions at DHFL will go to Piramal Capital & Housing Finance Ltd.
- Nominal Valuation of Avoidance Transactions: The Court upheld the resolution plan which assigned a nominal value of Rs. 1 to potential recoveries of Rs. 45,000 crores from avoidance transactions.
- Fresh Consideration by NCLT: The Court directed the NCLT to freshly reconsider the applications relating to the allocation of proceeds from avoidance transactions.
- Setting Aside NCLAT Order: The Court set aside the NCLAT order that had directed reconsideration of the resolution plan.
Legal Implications and Analysis
This judgment has several far-reaching implications for IBC jurisprudence:
1. Primacy of CoC’s Commercial Wisdom
The Supreme Court’s decision reaffirms the primacy of the CoC’s commercial wisdom in the resolution process. This is consistent with previous Supreme Court judgments, including the landmark case of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors. (2019), which emphasized that commercial decisions of the CoC are not ordinarily open to judicial review.
2. Treatment of Avoidance Transactions
The Court’s ruling provides clarity on the treatment of avoidance transactions under the IBC. By upholding the nominal valuation of these potential recoveries, the Court has implicitly recognized the speculative nature of such recoveries and the need for certainty in the resolution process.
3. Finality of Resolution Plans
The judgment reinforces the principle that once a resolution plan is approved by the CoC, there is limited scope for further negotiations or changes. This interpretation strengthens the finality and predictability of the resolution process, which is crucial for the effective functioning of the IBC.
4. Former Promoters’ Settlement Offers
By setting aside orders that directed consideration of the former promoter’s settlement offers, the Court has reinforced the position that promoters of defaulting companies cannot use settlement offers to regain control of the company once the CIRP is underway, especially after the CoC has approved a resolution plan.
Practical Implications for Stakeholders
For Resolution Applicants
Resolution applicants can now have greater confidence in the finality of the resolution process once the CoC approves their plan. This reduced uncertainty may encourage more potential bidders to participate in the resolution process.
For Financial Creditors
The judgment reinforces financial creditors’ decision-making authority through the CoC. It also provides clarity on how avoidance transaction recoveries should be treated within resolution plans.
For Resolution Professionals
Resolution professionals should ensure thorough identification and assessment of avoidance transactions during the CIRP. However, they can now factor in the uncertainty of recoveries from such transactions in their valuation exercises.
For Corporate Debtors and Promoters
The judgment further limits the avenues available to former promoters to regain control of the corporate debtor once the CIRP is underway. This underscores the importance of addressing financial distress before the initiation of formal insolvency proceedings.
Conclusion
The Supreme Court’s decision in the DHFL case represents a significant development in IBC jurisprudence. It strengthens the sanctity of the resolution process, emphasizes the finality of CoC-approved resolution plans, and provides clarity on the treatment of avoidance transactions.
While the Court has directed the NCLT to freshly reconsider applications relating to avoidance transactions, the core principles established by this judgment reinforce the IBC’s objective of providing a time-bound resolution process with minimal judicial intervention in commercial decisions.
This landmark judgment will likely serve as a guiding precedent for future cases involving similar issues under the IBC regime, further consolidating India’s insolvency framework.
Disclaimer: This blog post is for informational purposes only and does not constitute legal advice. Readers should consult with qualified legal counsel for advice on any specific legal matter.
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