A) ABSTRACT / HEADNOTE

The judgment resolves a complex cluster of appeals arising from the insolvency resolution of Dewan Housing Finance Corporation Limited (DHFL) under the Insolvency and Bankruptcy Code, 2016 (IBC). The central contest involved the permissibility of the clause in the Resolution Plan (RP) submitted by Piramal Capital, the Successful Resolution Applicant (SRA), which allowed it to appropriate the recoveries arising from Section 66 avoidance applications filed by the Administrator.

The National Company Law Appellate Tribunal (NCLAT) held that such a clause was illegal and remanded the plan back to the Committee of Creditors (CoC) for reconsideration. The Supreme Court, applying the limited scope of judicial review under Sections 30(2), 31, and 61(3) of the IBC, reinstated the NCLT-approved RP and set aside the NCLAT’s interference. The Court undertook a careful examination of the legal position on avoidance applications, the commercial wisdom of the CoC, and the rights of suspended or superseded directors under the IBC and the RBI Act, 1934.

The judgment further addressed the grievances of Fixed Deposit Holders (FDHs) and Non-Convertible Debenture Holders (NCDHs) who sought full repayment under the RP. The Court held that Section 238 of the IBC prevails over the NHB Act and RBI Act, and that FDHs constitute financial creditors bound by the CoC-approved distribution mechanism.

The Court also clarified that superseded directors of an FSP are not entitled to participate in the CoC or seek copies of RPs during CIRP, though once approved by the NCLT, the RP becomes a public document under Section 74 of the Evidence Act. The judgment thus harmonizes the treatment of avoidance recoveries, creditor rights, and director rights within the specialized insolvency regime for Financial Service Providers.

Keywords: Insolvency, Avoidance Applications, Section 66 IBC, Commercial Wisdom, CoC, FD Holders, RBI Act, Resolution Plan.

B) CASE DETAILS 

C) INTRODUCTION AND BACKGROUND OF JUDGMENT

The judgment arises from one of India’s most extensive corporate insolvencies involving a Financial Service Provider DHFL. Following significant findings of fraud, siphoning, and falsification of accounts, the RBI exercised powers under Section 45-IE of the RBI Act and superseded the Board, appointing an Administrator who initiated CIRP under the FSP Rules, 2019.

Multiple forensic and transaction audits conducted by KPMG and Grant Thornton revealed substantial avoidable transactions, prompting the filing of avoidance applications under Sections 43, 45, 47, 49, 50, and 66 of the IBC before the NCLT.

During the CIRP, the CoC evaluated several Resolution Plans. Piramal Capital, which initially bid only for the retail portfolio, later submitted a consolidated plan offering INR 37,250 crores . A key clause in the RP assigned the benefit of Section 66 recoveries to the SRA, while recoveries under Sections 43, 45, and 50 were to enure to creditors. The RP was approved with overwhelming voting 93.65% of the CoC, including 98.94% of debenture holders through their authorized representative .

The NCLT approved the RP on 07.06.2021, but the NCLAT set aside the clause relating to Section 66 recoveries, treating it as illegal and directing reconsideration by the CoC. Several stakeholders filed civil appeals before the Supreme Court, including the SRA, the Union Bank of India, 63 Moons, FDHs, NCDHs, and erstwhile directors Kapil Wadhawan and Dheeraj Wadhawan.

The appeals spanned three coordinated categories:

(i) avoidance applications,

(ii) FDH/NCDH claims, and

(iii) rights of ex-directors.

The Supreme Court heard all appeals together and adjudicated upon the scope of commercial wisdom, the locus of minority creditors, the treatment of public deposits, and the rights of superseded directors in FSP insolvency.

D) FACTS OF THE CASE

DHFL, a housing finance company, came under regulatory scrutiny following revelations of extensive fraudulent transactions. The CoC, after appointment of the Administrator under the RBI Act, commissioned audits that uncovered avoidable transactions involving preferential dealings, undervalued transfers, extortionate credits, and fraudulent or wrongful trading attracting Section 66.

Based on such reports, the Administrator filed multiple avoidance applications between August 2020 and early 2021 under Sections 43–51 and 66 .

The Resolution Plan of Piramal Capital, submitted in several stages of revisions between September 2020 and December 2020, finally offered INR 37,250 crores including cash and non-cash consideration.

The plan provided that avoidance recoveries under Sections 43, 45, 47, 49, and 50 would be for creditors, but the recoveries from Section 66 applications—relating to fraudulent trading would accrue to the SRA at a nominal valuation of INR 1 .

The CoC approved the plan with massive majority. 63 Moons, though part of the CoC through its debenture holdings, initially voted in favour within its class but later filed appeals before the NCLAT challenging the validity of the clause assigning Section 66 recoveries to the SRA. Parallelly, FDHs and NCDHs challenged the extinguishment or reduction of claims, arguing that their deposits were held in trust and deserved full repayment.

NCLAT, on 27.01.2022, partly allowed appeals and remanded the RP for reconsideration. It also recognized wider rights of superseded directors, directing that RPs ought to be made available post-approval. The SRA, banks, ex-directors, FDHs, NCDHs, and several trust entities filed appeals before the Supreme Court challenging various parts of the NCLAT orders. The Supreme Court examined each category of grievance distinctly.

E) LEGAL ISSUES RAISED

i. Whether the NCLAT could interfere with the commercial decision of the CoC regarding allocation of recoveries under Section 66 of the IBC?
ii. Whether minority creditors like 63 Moons had locus standi to challenge an approved RP under Section 61(3) of the IBC?
iii. Whether FDHs and NCDHs were entitled to full repayment under the NHB Act/RBI Act notwithstanding Section 238 of the IBC?
iv. Whether ex-directors superseded under Section 45-IE of the RBI Act retained rights analogous to suspended directors under the IBC to participate in the CIRP or receive copies of RPs?
v. Whether recoveries under Section 66 must mandatorily enure to the creditors or may be assigned to the SRA?

F) PETITIONER / APPELLANT’S ARGUMENTS

The SRA argued that the CoC, exercising commercial wisdom, had consciously bargained for higher upfront value in exchange for speculative Section 66 recoveries, which were rightly valued at INR 1 . Reliance was placed on K. Sashidhar v. Indian Overseas Bank and Committee of Creditors of Essar Steel v. Satish Kumar Gupta to emphasize limited judicial scrutiny. They submitted that 63 Moons, holding less than 0.3% voting share, lacked locus under Section 61(3).

Union Bank supported these submissions, arguing that the RP was approved with overwhelming majority and that the NCLAT had impermissibly isolated one commercial clause of a composite RP. The SRA further argued that ex-promoters, having been superseded under the RBI Act, had no entitlement to participate in the CIRP or access RP documents.

FDHs and NCDHs argued that the CoC-approved distribution adhered to Section 53 priorities, and that Section 238 of the IBC overrides conflicting provisions in sectoral statutes, making full repayment untenable.

G) RESPONDENT’S ARGUMENTS

63 Moons argued that Section 66 recoveries must benefit creditors, for the Resolution Professional is duty-bound under Section 25 to protect assets for the CD. They cited Venus Recruiters Pvt. Ltd. v. Union of India (Delhi High Court) to argue that avoidance recoveries are for the estate. They submitted that valuation of Section 66 claims at INR 1 was arbitrary, especially when audit reports indicated potential recoveries of INR 45,000 crores .

FDHs argued that deposits were held in trust and thus outside the insolvency waterfall. They contended that the NHB Act and RBI directives mandated full repayment and that depositor claims stood on a special footing superior to financial creditors.

The ex-promoters argued that supersession under the RBI Act does not extinguish participation rights under the IBC, contending that they were wrongly denied access to CIRP materials.

H) RELATED LEGAL PROVISIONS

i. Sections 30(2), 30(4), 31, 43–51, 60(5), 61(3), 66, 238 – Insolvency and Bankruptcy Code, 2016
ii. Section 45-IE – Reserve Bank of India Act, 1934
iii. NHB Act, 1987
iv. Financial Service Provider Rules, 2019
v. Section 74 Evidence Act – Public documents

I) JUDGMENT 

The Supreme Court first reaffirmed the limited scope of judicial scrutiny under Section 31 for the NCLT and Section 61(3) for the NCLAT. It emphasized that CoC decisions on feasibility, viability, and commercial considerations are non-justiciable unless they violate Section 30(2). The Court found that NCLAT had exceeded its jurisdiction by modifying a commercial clause of an approved RP.

The Court held that avoidance recoveries under Sections 43, 45, and 50 rightly belonged to creditors, but Section 66 fraudulent trading stood on a different footing. The CoC was competent to assign speculative recoveries to the SRA for consideration, and there was no illegality in the valuation exercise. The Court noted that the CoC had full knowledge of audit reports and financial projections before voting.

On the objections of FDHs, the Court held that Section 238 of the IBC prevails over the NHB Act and RBI Act. FDHs are financial creditors and must accept distribution as per the approved RP, especially as no statutory protection creates a priority outside the IBC waterfall.

On ex-directors, the Court held that supersession under the RBI Act meant they had vacated office and could not exercise rights analogous to suspended directors under the IBC. During CIRP, they were not entitled to attend CoC meetings or access RPs. However, once approved by the NCLT, the RP becomes a public document under Section 74 Evidence Act, and certified copies may be obtained.

Ultimately, the Court reinstated the NCLT-approved RP, restored the clause assigning Section 66 recoveries to the SRA, dismissed FDH and NCDH appeals, and rejected the claims of ex-directors.

a. RATIO DECIDENDI

The Court established that the commercial wisdom of the CoC is paramount and cannot be interfered with by the NCLAT except where statutory violations under Section 30(2) are demonstrated.

The Court underscored that valuation of avoidance transactions, including speculative Section 66 recoveries, lies within the domain of the CoC and their expert-driven assessment. The classification of avoidance applications under Chapter III (Sections 43–51) and fraudulent trading under Chapter VI (Section 66) justified distinct treatment.

The Court held that the CoC’s decision to assign Section 66 recoveries to the SRA was neither illegal nor irrational, especially when audit reports and commercial considerations were placed before the CoC. K. Sashidhar and Essar Steel principles guided the Court’s reaffirmation that CoC decisions cannot be judicially re-evaluated on merits.

Further, the Court clarified that superseded directors under Section 45-IE of the RBI Act do not enjoy the same participatory rights as suspended directors under the IBC. For FDHs, the Court held that special statutory regimes do not override the IBC due to Section 238. Thus, the legal backbone of the judgment is the supremacy of commercial wisdom, the limited jurisdiction of appellate bodies, and the priority of IBC over sectoral statutes.

b. OBITER DICTA

The Court observed that once a Resolution Plan is approved under Section 31, it becomes a public document within the meaning of Section 74 of the Evidence Act, enabling even ex-directors to obtain certified copies. This clarifies transparency norms post-approval.

The Court also commented that although avoidance applications are intended to restore value to the CD, the IBC does not prohibit CoC from commercializing or assigning speculative recoveries, provided the process is informed and transparent. It elaborated that avoidance recoveries are not inherently part of the liquidation estate unless so decided under an approved RP.

Further, regarding FSP insolvency, the Court observed that supersession creates a statutory vacuum that cannot be harmonized with rights available to suspended directors under the IBC. This distinction should guide future FSP CIRPs.

c. GUIDELINES 

i. Appellate bodies must respect the limited jurisdiction under Section 61(3) and avoid interfering with commercial clauses of RPs unless a violation of Section 30(2) is clearly established.
ii. CoC may assign speculative or contingent recoveries, including Section 66 recoveries, if done transparently and backed by valuation reports.
iii. Superseded directors under the RBI Act are not entitled to CoC participation or CIRP documents during the process.
iv. Once the RP is approved under Section 31, it becomes a public document under the Evidence Act, and certified copies must be made available on request.
v. FDHs and NCDHs in the insolvency of an FSP must be treated as financial creditors bound by the CoC-approved distribution unless specific statutory protections override the IBC with a non-obstante clause.

J) CONCLUSION & COMMENTS

The judgment strengthens the legal architecture of the IBC by reinforcing the commercial primacy of the CoC. By reversing the NCLAT’s intervention, the Court reaffirmed the non-negotiable boundary between judicial review and commercial decision-making.

The treatment of Section 66 recoveries sets an important precedent permitting the monetization or assignment of avoidance recoveries in RPs, thereby enhancing flexibility in resolution strategies.

The decision also clarifies that the insolvency of Financial Service Providers involves regulatory overlays but does not displace the IBC’s overriding control. FDHs and NCDHs must therefore operate within the insolvency waterfall, barring express statutory protections.

The Court’s clarification on ex-directors demarcates the limits of participation rights in supersession scenarios. This distinction preserves regulatory supremacy under the RBI Act while keeping CIRP efficient and shielded from management affected by fraudulent conduct.

Overall, the judgment integrates multiple legal issues—avoidance proceedings, CoC powers, depositor rights, and regulatory supersession—into a coherent reaffirmation of the IBC’s core philosophy: value maximization through creditor-driven commercial assessment with minimal judicial interference.

K) REFERENCES

a. Important Cases Referred

i. K. Sashidhar v. Indian Overseas Bank, cited in judgment
ii. Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta
iii. Venus Recruiters Pvt. Ltd. v. Union of India (Delhi High Court), referenced in arguments

b. Important Statutes Referred

i. Insolvency and Bankruptcy Code, 2016
ii. Reserve Bank of India Act, 1934
iii. National Housing Bank Act, 1987
iv. Financial Service Provider Rules, 2019
v. Indian Evidence Act, 1872