Supreme Court Directs Consideration of Depositors’ Claims in DHFL Insolvency: Vinay Kumar Mittal vs. DHFL (2020)

LEGAL ISSUE: Whether the claims of fixed deposit holders should be prioritized over other creditors during the insolvency resolution process of a financial service provider.

CASE TYPE: Insolvency Law

Case Name: Vinay Kumar Mittal & Ors. vs. Dewan Housing Finance Corporation Ltd. & Ors.

Judgment Date: 31 January 2020

Date of the Judgment: 31 January 2020
Citation: Not Available
Judges: L. Nageswara Rao, J. and Deepak Gupta, J.

Can the concerns of fixed deposit holders be overlooked during the insolvency of a financial institution? The Supreme Court addressed this crucial question in the case of Vinay Kumar Mittal vs. Dewan Housing Finance Corporation Ltd. The court considered appeals against interim orders of the High Court of Judicature at Bombay and the Debts Recovery Tribunal-I, Mumbai, which had restricted payments to fixed deposit holders of Dewan Housing Finance Corporation Ltd. (DHFL). The Supreme Court clarified that the claims of depositors should be duly considered during the corporate insolvency resolution process (CIRP).

Case Background

The case revolves around Dewan Housing Finance Corporation Limited (DHFL), a financial service provider that faced financial difficulties. Reliance Nippon Life Asset Management Ltd. (Respondent No. 4) had filed a commercial suit against DHFL for recovery of dues related to Non-Convertible Debentures (NCDs). DHFL had issued NCDs to Respondent No. 4 through both public offer and private placement. Due to downgrading of DHFL’s NCDs, Respondent No. 4 was entitled to early redemption, which DHFL failed to fully pay.

The High Court of Judicature at Bombay initially restrained DHFL from making payments to unsecured and secured creditors, except on a pro-rata basis to secured creditors. This order was later modified to allow payments under assignment agreements with banks. The Appellants in this case are fixed deposit holders of DHFL, who were aggrieved by the High Court’s orders that restricted payments to them. They appealed to the Supreme Court seeking preference over other creditors.

Timeline

Course of Proceedings

The High Court of Judicature at Bombay initially restrained DHFL from making payments to unsecured and secured creditors, except on a pro-rata basis to secured creditors, in response to a suit filed by Reliance Nippon Life Asset Management Ltd. for recovery of dues. This order was extended and similar orders were passed in other commercial suits. The High Court later clarified that DHFL could make payments under assignment agreements with banks. Aggrieved by these orders, which restricted payments to them, the fixed deposit holders appealed to the Supreme Court.

The Reserve Bank of India (RBI) filed an application before the National Company Law Tribunal (NCLT), Mumbai, to initiate the Corporate Insolvency Resolution Process (CIRP) against DHFL. The NCLT imposed a moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC), prohibiting any suits or continuation of proceedings against DHFL. The High Court took note of this and granted liberty to the parties to approach the NCLT for redressal of their grievances.

Legal Framework

The Appellants relied on the following legal provisions:

• Section 36 of the National Housing Bank Act, 1987: This provision relates to the powers of the National Housing Bank to regulate housing finance institutions.
• Section 36(A) of the National Housing Bank Act, 1987: This section deals with the power of the National Housing Bank to give directions to housing finance institutions.
• Section 45(q)(a) of the Reserve Bank of India Act, 1934: This section pertains to the power of the Reserve Bank of India to give directions to Non-Banking Financial Companies (NBFCs) regarding acceptance of deposits.
• Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC): This section relates to the imposition of a moratorium during the CIRP, which prohibits any suits, continuation of proceedings, or execution of decrees against the corporate debtor.
• Section 21(6A)(b) of the Insolvency and Bankruptcy Code, 2016 (IBC): This section includes public depositors as a class of creditors in the CIRP.
• Rule 5 of the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicatory Authority), Rules, 2019 (FSP Rules): This rule deals with the initiation of CIRP against financial service providers.

These provisions were invoked to argue that the fixed deposit holders should be given preference over the contractual claims of debenture holders. The IBC provisions were also relevant in the context of the moratorium imposed and the inclusion of depositors as a class of creditors during the CIRP.

Arguments

Arguments by the Appellants (Fixed Deposit Holders):

• The Appellants argued that, based on Section 36 and 36 (A) of the National Housing Bank Act, 1987 and Section 45 (q) (a) of the Reserve Bank of India Act, 1934, the repayment of their fixed deposits should be prioritized over the claims of debenture holders.
• They contended that the interim orders passed by the High Court and the Debts Recovery Tribunal-I, Mumbai, were impeding the consideration of their claims by the Committee of Creditors and the Administrator.
• The Appellants also argued that the decision of the Committee of Creditors on 30.12.2019, which allowed DHFL to commence lending operations without paying the depositors, was arbitrary and illegal.

Arguments by the Reserve Bank of India (RBI):

• The RBI informed the Court that it had filed an application under Section 227 and 239 (2) (zk) of the IBC read with Rule 5 and 6 of the FSP Rules before the NCLT, Mumbai, to initiate the CIRP against DHFL.
• The RBI also informed the Court that the NCLT had passed an order on 03.12.2019, imposing a moratorium under Section 14 of the IBC.

Arguments by the Administrator:

• The Administrator submitted that the claims of the depositors shall be considered by the Committee of Creditors and the Administrator without being influenced by the orders passed by the High Court and the Debts Recovery Tribunal.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame specific issues, but the core concerns revolved around:

• Whether the interim orders passed by the High Court and the Debts Recovery Tribunal-I, Mumbai, should influence the consideration of claims made by the depositors before the Committee of Creditors and the Administrator.
• Whether the decision of the Committee of Creditors on 30.12.2019, allowing DHFL to commence lending operations without paying the depositors, was valid.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following legal provisions:

• Section 36 of the National Housing Bank Act, 1987: Relating to the powers of the National Housing Bank to regulate housing finance institutions.
• Section 36(A) of the National Housing Bank Act, 1987: Dealing with the power of the National Housing Bank to give directions to housing finance institutions.
• Section 45(q)(a) of the Reserve Bank of India Act, 1934: Pertaining to the power of the Reserve Bank of India to give directions to NBFCs regarding acceptance of deposits.
• Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC): Relating to the imposition of a moratorium during the CIRP.
• Section 21(6A)(b) of the Insolvency and Bankruptcy Code, 2016 (IBC): Including public depositors as a class of creditors in the CIRP.
• Rule 5 of the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicatory Authority), Rules, 2019 (FSP Rules): Dealing with the initiation of CIRP against financial service providers.

Judgment

How each authority was viewed by the Court:

• The Court considered Section 36 and 36(A) of the National Housing Bank Act, 1987 and Section 45(q)(a) of the Reserve Bank of India Act, 1934 in the context of the Appellants’ argument for preferential treatment of depositors’ claims.
• The Court acknowledged the moratorium imposed under Section 14 of the IBC and the inclusion of public depositors as a class of creditors under Section 21(6A)(b) of the IBC.
• The Court also noted the initiation of CIRP against DHFL under Rule 5 of the FSP Rules.

What weighed in the mind of the Court?

The Supreme Court’s primary concern was to ensure that the claims of the fixed deposit holders were given due consideration during the Corporate Insolvency Resolution Process (CIRP) of DHFL. The Court emphasized that the interim orders of the High Court and the Debts Recovery Tribunal should not hinder the fair assessment of these claims. The Court also recognized the large number of depositors, many of whom had invested their life savings, and expressed confidence that their concerns would be addressed in accordance with the law. The Court also emphasized that the depositors are being represented by the Authorized Representative before the Committee of Creditors. The Court was also conscious of the fact that the matter is already before the NCLT and the Committee of Creditors.

Logical Reasoning:

The Supreme Court did not interfere with the decision of the Committee of Creditors but clarified that the claims of the depositors should be considered without being influenced by the orders passed by the High Court and the Debts Recovery Tribunal-I, Mumbai. The Court stated, “the claims that are made by the depositors shall be considered by the Committee of Creditors and the Administrator without being influenced by the orders passed by the High Court on 10.10.2019 as modified by order dated 13.11.2019, as well as the order passed by the Debts Recovery Tribunal-I, Mumbai on 08.11.2019.” The Court further observed that “the depositors are being represented by the Authorized Representative before the Committee of Creditors” and that it was leaving it open to the Appellants to raise all points and contentions before the Committee of Creditors, the Administrator and, if necessary, the NCLT. The Court noted that “there are nearly one lakh depositors who have invested their life time earnings with Respondent No.1.”

The Court did not delve into the merits of the decision taken by the Committee of Creditors on 30.12.2019, which allowed the Administrator to carry on the lending operations of DHFL without paying the depositors. The Court clarified that the concerns of the depositors and their rights shall be considered in accordance with law.

Key Takeaways

• The Supreme Court directed that the claims of fixed deposit holders must be considered during the CIRP, without being influenced by prior orders of the High Court or Debts Recovery Tribunal.
• The Court did not interfere with the decision of the Committee of Creditors, but emphasized that depositors’ concerns must be addressed in accordance with law.
• This judgment highlights the importance of protecting the interests of small depositors in insolvency proceedings of financial institutions.
• The Court’s decision ensures that the depositors have a chance to have their claims considered during the CIRP.

Directions

The Supreme Court directed that the claims of the depositors be considered by the Committee of Creditors and the Administrator without being influenced by the orders passed by the High Court and the Debts Recovery Tribunal-I, Mumbai. The Court also clarified that it was leaving it open to the Appellants to raise all points and contentions before the Committee of Creditors, the Administrator, and if necessary, the NCLT.

Development of Law

The ratio decidendi of this case is that the claims of fixed deposit holders should be duly considered during the Corporate Insolvency Resolution Process (CIRP) of a financial service provider, and that interim orders of High Courts and Debts Recovery Tribunals should not hinder the fair assessment of these claims. This case reinforces the importance of protecting the interests of depositors in insolvency proceedings. There is no specific change in the previous position of law.

Conclusion

In conclusion, the Supreme Court’s judgment in Vinay Kumar Mittal vs. Dewan Housing Finance Corporation Ltd. ensures that the claims of fixed deposit holders are given due consideration during the insolvency resolution process of DHFL. The Court’s intervention provides a crucial safeguard for the interests of small depositors, directing that their concerns be addressed in accordance with the law. The Court clarified that the Committee of Creditors should consider the claims of the depositors without being influenced by the orders of the High Court and the Debts Recovery Tribunal.