PIRAMAL CAPITAL AND HOUSING FINANCE LIMITED [APPELLANT (S)]  Vs.  63 MOONS TECHNOLOGIES LIMITED  [RESPONDENT (S)]

CIVIL APPEAL NOS. 1632-1634 OF 2022

(2JB, BELA M. TRIVEDI and SATISH CHANDRA SHARMA JJ., delivered by BELA M. TRIVEDI, J.)

The Supreme Court of India recently ruled that applications related to “fraudulent and wrongful trading” by a Corporate Debtor (CD) cannot be classified as “avoidance applications” under the Insolvency and Bankruptcy Code, 2016 (IBC). This decision came in a batch of civil appeals, including one filed by Piramal Capital and Housing Limited (formerly DHFL), challenging a common judgment of the National Company Law Appellate Tribunal (NCLAT), New Delhi.

A two-judge bench of Justice Bela M. Trivedi and Justice Satish Chandra Sharma clarified that avoidance applications under IBC are strictly for setting aside preferential, undervalued, or extortionate transactions, as covered under Sections 43, 45, and 50 of the IBC. In contrast, fraudulent and wrongful trading applications fall under Section 66 of the IBC. The Court emphasized that both categories operate under different provisions, and the adjudicating authority must distinguish between them when handling applications filed by the Resolution Professional (RP).

If an RP files a combined application under Sections 43, 45, 50, and 66, the adjudicating authority must assess each provision separately before making a decision. The Supreme Court’s ruling limits the scope of interference by NCLAT in cases where a resolution plan has been approved by the Committee of Creditors (CoC) and subsequently endorsed by the adjudicating authority.

Dewan Housing Finance Corporation Limited (DHFL), a non-banking financial company, was accused of orchestrating one of India’s largest financial frauds. Allegations included loan fraud, money laundering, and the creation of fake borrowers and shell companies. Due to the magnitude of the scam, the Reserve Bank of India (RBI) took control of DHFL’s board in November 2019 and initiated Corporate Insolvency Resolution Process (CIRP) proceedings before the National Company Law Tribunal (NCLT).

Following this, NCLT appointed an Administrator, who invited bids for resolution plans. Piramal Capital and Housing Limited submitted a resolution plan, which was approved by the CoC with a 93.65% vote and subsequently sanctioned by NCLT. However, 63 Moons Technologies Limited, a creditor, challenged the resolution plan before the NCLAT. The NCLAT set aside a clause allowing the successful resolution applicant to appropriate recoveries from avoidance applications filed under Section 66. It then directed the CoC to reconsider the plan, leading to an appeal before the Supreme Court.

The Supreme Court reiterated that once a resolution plan is approved by the CoC and meets the requirements of Section 30(2) of the IBC, the adjudicating authority must approve it without interference. It also stated that judicial review by NCLT under Section 31 is limited to ensuring compliance with Section 30(2), and NCLAT’s appellate jurisdiction under Section 61 is restricted to specific grounds under subsection (3).

The Court highlighted that avoidance applications and applications related to fraudulent and wrongful trading should be treated separately. It directed the NCLT to handle each application based on the specific legal provisions applicable.

The Supreme Court set aside NCLAT’s judgment and reaffirmed that fraudulent and wrongful trading applications under Section 66 cannot be treated as avoidance applications under Sections 43, 45, or 50. It directed NCLT to decide on pending applications in accordance with the relevant legal provisions. This ruling clarifies the legal distinction between different types of insolvency applications and strengthens the framework for CIRP proceedings under IBC.