The National Company Law Appellate Tribunal (NCLAT), New Delhi bench comprising Judicial Member Justice M. Venugopal and Technical Members V. P. Singh and Dr. Ashok Kumar Mishra, recently held that there is no provision in either the RBI Act, the NHB Act, or any other law that mandates that depositors have to be paid in full.
The Appellant filed the present Appeal before the Appellate Tribunal against the impugned Order passed by the Adjudicating Authority and the subsequent conduct of Respondent No.2, failing to secure the interest of the Appellant as a deposit holder and secured financial creditor of the Corporate Debtor.
The RBI Act and the NHB Act merely provide that the licence of a Housing Finance Corporation and Non-Banking Finance Company may be cancelled if the deposit holders are not paid. Such a decision can be taken only after giving the concerned HFC or NBFC the opportunity to present its case. None of the legislation provides that FD Holders are required to be paid in full. Hence the Appellant's contention was based on an incorrect interpretation of the law.
The Learned Senior Counsel for the Appellant represented that the amount deposited by FD Holders were held in trust by DHFL. In response to the above contentions, the Ld. Sr. Counsel for CoC submitted that Rule 10 of the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of FSPs and Application to Adjudicating Authority) Rules, 20195 is only applicable in situations where assets of third parties are held in trust by the Corporate Debtor.
FD Holders had not filed any documents to show that amount deposited by the FD Holder was assets held in trust. Therefore, there is no legal justification whatsoever given by the Appellant/F.D. Holder to show that the money deposited by them was held in trust by DHFL and the amount held by DHFL were not assets of DHFL. Thus, Rule 10 of FSP Rules is inapplicable to the amount deposited by FD Holders.
The Learned Senior Counsel representing CoC submitted that no full payment right exists under the NHB Act, the RBI Act, or any other subordinate legislation. Moreover, even if it exists, any such request would be wholly repugnant to provisions of the Code, which provide for a specific manner and priority of Payment; hence will not be applicable in terms of Section 238 of the Code. The minimum amount a creditor is mandatorily required to be paid in a Resolution Plan, i.e. liquidation value.
It is well-established law that when two special statutes contain a non-obstante clause, the latter will prevail over the earlier statute. In case of any inconsistency between the provision of the Code and any other enactment, the provision of the Code will prevail. Therefore, provisions of the Insolvency and Bankruptcy Code enacted later will have an overriding effect over the NHB Act and the RBI Act by the non-obstante clause.
In the case of Innoventive Industries Limited v. ICICI Bank, REED 2017 SC 08563, the Hon'ble Supreme Court had held that in case of any inconsistency between the provisions of the Code and any other law, the provisions of the Code shall prevail. Therefore, Insolvency & Bankruptcy Code which was enacted later will override the NHB Act and RBI Act by the non-obstante clause of Section 238 of the Code.
Appellants case that the amount of fixed deposit held by the Bank as a trustee is the property of the customer held by the Bank as a trustee is negated by the recent observation in para 44 of the Judgment of the Hon'ble Supreme Court in the case of N. Raghavender v. state of Andhra Pradesh, CBI, reported in 2021 SCC online SC 1232. Therefore, it is clear that the relationship between the customer and the Bank is the creditor and debtor and not a trustee. The Bank is not a trustee of money deposited by customers. In this case, the Corporate Debtor, i.e. DHFL, took a fixed deposit from their customers on the agreed interest on the amount invested in fixed deposits. Therefore, the relationship of the DHFL with the fixed deposit holders is that of a creditor and debtor and not of a trustee. The money so deposited becomes a part of the DHFL's funds which is under a contractual obligation to pay the sum deposited by a customer to him and on maturity or as per the terms of the contract they were getting an agreed rate of interest. Such a relationship between the DHFL & the fixed deposit holders is one of the creditor and debtor and not of a trustee.
Hon'ble Supreme Court in the Committee of Creditors of Essar steel v. Satish Kumar Gupta and Others reported in REED 2019 SC 11505, has reinforced the position that the COC is the key decision-maker in the rehabilitation of Corporate Debtors. For the approval of the Resolution Plan, the Committee of Creditors is to take a business decision based on ground realities by a majority, which binds all the stakeholders, including dissenting creditors. The Adjudicating Authority cannot interfere on merits with the commercial decision taken by the Committee of Creditors. The limited judicial review available is to see that the Committee of Creditors has taken into account the fact that the Corporate Debtor needs to keep going as a going concern during the Insolvency Resolution Process; it needs to maximise the value of its assets; and that the interest of all stakeholders including Operational Creditors has been taken care of. Therefore, it is the commercial wisdom of the requisite majority of the Committee of Creditors which is to negotiate and accept the Resolution Plan, which may involve differential Payment in different classes of creditors, together with negotiating with the prospective Resolution Applicant for better or different terms which may also involve differences in the distribution of amounts between the different classes of creditors.
Having participated in the CIRP, the Appellant's cannot challenge the action of the COC to approve the Resolution Plan, which is otherwise in compliance with the provisions of the IBC. In the light of the Hon'ble Supreme Court decision in Essar Steel, REED 2019 SC 11505, it was unequivocally clear that the CoC members have the critical task of not only running the resolution process but also working towards maximisation of the value of the Corporate Debtor for all the stakeholders, not fixed deposit holders alone, and providing for the manner of distribution of funds as obtained by way of a resolution plan. By seeking Payment outside the resolution process, the appellants who are also CoC members (other CoC members being banks, etc. are acting in a silo for obtaining funds at the outset, which is not only against the interest of all the stakeholders but also against a holistic resolution for maximisation of value & distribution of funds between different classes of creditors.
As per the decision of the Hon'ble Supreme Court in Rajendra K. Bhutta v. Maharashtra Housing and Area Development Authority and Others reported in REED 2020 SC 02501 (para 26), it is settled that provisions of section 14 of the IBC must be strictly observed. Section 14 of IBC inter alia prohibits alienation, transfer, disposal of any asset of the Corporate Debtor. Since IBC is a time-bound process, every delay is the death knell for the Corporate Debtor. The object behind imposing a moratorium under Section 14 is to maintain the status quo for the Corporate Debtor so maximisation of value of assets and laws of recovery to the creditors of the Corporate Debtor. Therefore, any payment to the Appellant during the moratorium regarding fixed deposits or interest would violate Section 14 of IBC.
Further, there is no rationale for treating the deposit holders as separate classes and providing them preferential treatment. IBC already contains various safeguards for the public deposit holders, including an Authorised Representative who can effectively represent that class of creditors. The Hon'ble Supreme Court has already examined the validity of the provisions relating to the Authorised Representative and upheld the same. The ILC report dated October 4 2019 (para 17) contains that the depositors in an FSP are to "be classified as Financial Creditors and be treated accordingly".
The Public Deposit Holders stand on an equal footing with other Financial Creditors of DHFL. Suppose relief, as sought by the Appellant, seeking a refund in repayment of fixed deposits, are granted; in that case, similar claims regarding repayment of dues will be made on behalf of NCD holders and other creditors, which would be detrimental to the corporate insolvency process of DHFL. Even otherwise, any monies raised during the Resolution Process is towards keeping the business alive as a going concern and not for out of turn or pre-resolution process claims, that too outside the Scheme of the IBC. Moreover, if payments were to be made to fixed deposit holders whose fixed deposits have matured, it would result in a situation where matured fixed deposit holders would obtain a preference as a special dispensation, as opposed to fixed deposit holders, whose fixed deposits have not matured, thereby resulting in the differential an unequivocal treatment within similarly situated creditors. Therefore, no special dispensation ought to be granted outside the mechanism/process envisaged under the IBC, which provides for the commercial wisdom of the COC to reign supreme for the distribution of funds.
Hon'ble Supreme Court has observed that while exercising the interpretative task by the Adjudicating Authority and the Appellate Authority, the powers are limited, to the extent that infrastructure under the Code is sufficiently developed to enable to take critical decisions for maximisation of the value of the Corporate Debtor and to keep it as a going concern.
The Hon'ble Supreme Court has further crystallised the powers of the NCLT/NCLAT by specifying that under Section 60 (5) (c) of the IBC or Rule 11 of NCLT Rules, powers are limited to the extent relating to the border compliance with the insolvency framework and its underlying objective. The adjudicating mechanisms that have and must be cautious in granting reliefs may run counter to the timelines and centre to the IBC. Any judicial creation of a procedural or substantive remedy that is not envisaged raised by the statute would violate the principles of separation of powers and run the risk of altering the delicate coon designed by the IBC framework.
It is pertinent to mention that there is no provision in either the RBI Act, the NHB Act, or any other law that mandates that depositors have to be paid in full. The RBI Act and the NHB Act merely provides that the license of an HFC or NBFC may be cancelled if the deposit holders are not paid. Such a decision can be taken only after allowing the concerned HFC or NBFC to present its case. None of the legislation provides that FD holders are required to be paid in full. Therefore, it is not the case of the Appellant's that RBI is not empowered to act under the RBI Act or the FSP Rules. The Appellants acknowledges that statutory mandate made available to the RBI under the RBI Act and the FSP Rules. However, the Appellant wishes to advise the Regulator as to the course of action that ought to have been followed by the Regulator. This is legally impermissible, misconceived and untenable.
In the instant case, the RBI, in the exercise of its administrative discretion under Section 45-IE of the RBI Act, superseded the board of DHFL and appointed an administrator. Accordingly, it decided to initiate the resolution proceedings with respect to DHFL under the IBC and not the RBI Act. Appellant's contention is mainly about the obligation of the administrator and the successor in the interest of the DHFL to ensure full repayment of deposit to have FD holders under the RBI and NHB act. It is further contended that there is no inconsistency between the provisions of the IBC and other provisions of law requiring repayment to deposit holders as per the terms and conditions of the deposit.
The RBI Act and the NHB Act merely provides that the license of an HFC or NBFC may be cancelled if the deposit holders are not paid. Such a decision can be taken only after allowing the concerned Housing Finance Company or NBFC to present its case. None of the legislation provides that FD holders are required to be paid in full. Therefore, it is not the case of the Appellant's that RBI is not empowered to act under the RBI Act or the FSP Rules.
It is clear that NCLT or NCLAT have been endowed with limited jurisdiction as specified under the Code and cannot act as a court of equity or exercise plenary powers. Therefore, the fixed deposits of the Appellant's made from the lifetime earnings of the employees invested by the Provident Fund Trust with the Corporate Debtor, i.e. Financial Service Providers, is of no consequence. Accordingly, it cannot be a condition authorising interference with the commercial wisdom of the CoC.
Therefore, even if the contribution of hard-earned money by Employees of the Air Force is invested in FD's of FSP, i.e. DHFL, and RBI as Regulator had initiated CIRP under the I& B Code, then the allocation of recoveries to the creditors shall be as per approved Resolution Plan only. Accordingly, NCLT or NCLAT cannot exercise equity jurisdiction to prevail over the commercial wisdom exercised by the creditors' committee.
Undisputedly the corporate debtor DHFL defaulted in making its payment obligations; therefore, RBI as a regulator itself stepped in and initiated insolvency proceedings of the erstwhile corporate debtor under the IBC read with FSP rules. It is a settled position of law that once a company is admitted into Insolvency, the IBC is a complete and exhaustive code that governs the entire process. Despite such a statutory mandate under IBC, the Appellant contends that the manner of distribution towards F D holders must uniquely be handled according to the National Housing Bank Act, 1987 and Reserve Bank of India Act 1934. The NHB and RBI Act operate in ordinary circumstances when a company is not undergoing Insolvency. As such, creditors of the Company under Insolvency cannot seek to enforce the NHB Act and RBI act provisions. In any event, it is amply clear that neither the provisions of the NHB Act nor the RBI act guarantees full repayment of deposits.
Based on the above discussion, we have unanimously concluded that impugned Order regarding the Payment to the Appellants against their FD's as per the approved resolution plan with the requisite majority as required under law needs no interference and both the appeals were dismissed.