OVERVIEW
In February, 2025,1 we wrote an article, titled 'Avoidance Applications Post CIRP- An Unavoidable Dilemma', analysing the legal framework and judicial precedents on appropriation of recoveries arising from avoidance and fraudulent transactions. In this article we had expressed our view that a plan approved by the Committee of Creditors ("CoC"), which provides for payment of proceeds from such proceedings to the successful resolution applicant shall not be violative of the Insolvency and Bankruptcy Code, 2016 ("Code") or its regulations. However, in view of the various appeals pending before the Hon'ble Supreme Court on this issue, we had observed that the dilemma relating to treatment of avoidance applications post CIRP shall continue till the final verdict. The said issue has now been finally decided in Piramal Capital and Housing Finance Limited v. 63 Moons Technologies Limited & Ors.2 ("Piramal judgement") wherein the Apex Court has clarified and resolved the ambiguity involving the treatment of proceeds arising from section 66 proceedings.
BACKGROUND
The corporate debtor herein, Dewan Housing Finance Corporation Limited, is a non-banking finance company against whom CIRP was initiated by the National Company Law Tribunal, Mumbai ("Adjudicating Authority") on December 3, 2019. Subsequently, a transaction audit was conducted to unearth transactions which are in the nature of preferential, undervalued, fraudulent and extortionate ("PUFE") transactions. Based on the transaction audit report, the administrator had filed 8 PUFE applications for an aggregate amount of Rs. 45,050 crores. In the meantime, the administrator, after multiple rounds of revision and following the recommendations of the CoC in its 7th meeting, issued the final version of Request for Resolution Plan Proposal ("RFRP") on September 16, 2020, wherein resolution applicants were allowed to ascribe a value to section 66 applications and propose the manner of dealing with any recoveries therefrom. Thereafter, all compliant resolution plans were voted on and the resolution plan of Piramal Capital and Housing Finance Limited ("Piramal"/ "SRA") was approved by CoC with 93.65% votes.
Being aggrieved, one of the NCD holders of the corporate debtor, 63 Moons filed an application challenging the provision of the approved resolution plan, which stated that recoveries from section 66 proceedings will accrue to SRA. However, the Adjudicating Authority vide separate orders dismissed the said application of 63 Moons and approved the resolution plan of Piramal. Consequently, several parties, including 63 Moons, Roopjyot Engineering Private Limited and 3 others (collectively referred to as "Roopjyot and Ors."), challenged the aforesaid orders passed by the Adjudicating Authority before the National Company Law Appellate Tribunal, New Delhi ("NCLAT"). The NCLAT, through a common judgement, directed that the term in the approved resolution plan allowing the SRA to appropriate proceeds, if any, from section 66 proceedings be set aside and the plan was sent back to CoC for reconsideration ("Impugned Judgement").
The SRA preferred an appeal against the Impugned Judgement before the Apex Court, contending that the NCLAT has unilaterally modified the approved resolution plan disregarding the commercial wisdom of the CoC. 63 Moons also challenged the Impugned Judgement only to the extent that the NCLAT sent back the approved resolution plan to the CoC for reconsideration.
DECISION
The Apex Court allowed the appeal of the SRA and set aside the Impugned Judgement passed by the NCLAT. The Apex Court held that in terms of the CoC approved resolution plan, recoveries from applications filed under sections 43 to 51 of the Code would go to CoC, whereas proceeds from section 66 proceedings would vest in the SRA. In connection therewith, the Apex Court made the following observations:
- Approved resolution plan in compliance with the RFRP: The Apex Court referred to the revised RFRP dated September 16, 2020, which expressly stated that the resolution applicant should assign a value to potential recoveries accruing from section 66 proceedings and outline the treatment of proceeds. Accordingly, Piramal ascribed a notional value of Rs. 1 to section 66 proceedings, with any positive recovery accruing solely to Piramal's benefit. Since, Piramal's plan complied with the RFRP and the CoC, acknowledging the uncertainty of recoveries accruing from section 66 proceedings, took a conscious decision in its commercial wisdom to accept the said clause in the SRA's plan.
- Any financial creditor, of a particular class who collectively votes in favour of the plan, is estopped from challenging the same: In the instant case, the NCD holders, i.e., 63 Moons along with Roopjyot and Ors., belonged to different sub-classes of financial creditors. While 63 Moons, individually as well as collectively as a class, voted in favour of Piramal's resolution plan, Roopjyot and Ors. individually abstained from voting. However, as a class, Roopjyot and Ors. approved the plan. Therefore, 63 Moons and Roopjyot and Ors. were bound by the collective decision of their class to approve the plan and were estopped from raising any objection against the CoC approved plan.
- Erroneous reliance on Venus judgement3: The Apex Court held that the NCLAT's reliance on the Venus judgement was misconceived. The question for consideration was whether an application under section 43 of the Code could survive after the approval of plan. However, the question that arose in the instant case was the treatment of proceeds arising from section 66 proceedings.
- Scope of NCLAT's judicial review of a CoC approved resolution plan is limited to the grounds specified under section 61(3) of the Code: The Apex Court appreciated that the plan approved by the CoC was an outcome of the commercial bargain struck between the CoC and Piramal, where it was agreed that recoveries from transactions under sections 43 to 51 of the Code would benefit the creditors, while recoveries under section 66 would accrue to Piramal. The CoC approved plan was further approved by the Adjudicating Authority under section 31(1) of the Code. In the absence of any perversity in the approved plan, the NCLAT should not have interfered with the plan approved by the CoC and the Adjudicating Authority.
CONCLUDING THOUGHTS
The Piramal judgement once again clarifies that once the CoC approves a resolution plan, neither the NCLT nor the NCLAT can sit in appeal to modify such a plan, in the absence of any perversity. The Apex Court's verdict reinforces our argument in our previous article that a plan which provides for payment of proceeds from section 66 proceedings to the SRA is not violative of the Code. The Piramal judgement further clarified that avoidance transactions and fraudulent transactions under Chapter III and VI of the Code must be decided separately and recoveries to be distributed in accordance with the approved plan. This decision settles the issue definitively and provides much-needed clarity to all the stakeholders involved in the insolvency resolution of a corporate debtor.
Footnotes
2. 2025 SCC OnLine SC 690
3. 2020 SCC OnLine Del 1479
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