Strategic Implications of Union Bank of India v. Kapil Wadhawan: Navigating Settlement Proposals under the IBC

Strategic Implications of Union Bank of India v. Kapil Wadhawan: Navigating Settlement Proposals under the IBC

Introduction

The case of Union Bank Of India v. Kapil Wadhawan And Others adjudicated by the National Company Law Appellate Tribunal (NCLAT) on May 25, 2021, serves as a pivotal reference in the realm of corporate insolvency and restructuring in India. This litigation primarily revolves around the Corporate Insolvency Resolution Process (CIRP) initiated against Dewan Housing Finance Corporation Ltd. (DHFL), highlighting procedural nuances under the Insolvency and Bankruptcy Code, 2016 (IBC).

The key parties involved include Union Bank of India as the appellant, DHFL as the corporate debtor, and the Reserve Bank of India (RBI) acting as the regulator overseeing the process. Central to the dispute is the admissibility and procedural compliance of settlement proposals submitted by the promoters, which the appellant contends were in violation of the IBC provisions.

Summary of the Judgment

The NCLAT examined the proceedings of the CIRP against DHFL, particularly focusing on the settlement proposals submitted by the original promoter, Kapil Wadhawan. The Tribunal found that these proposals were not in compliance with Section 12A of the IBC, which dictates the framework for CIRP against financial service providers under the purview of regulatory bodies like the RBI.

Despite recognizing that the settlement proposals did not qualify as valid resolution plans under the IBC, the Tribunal upheld the decision of the Adjudicating Authority to direct the Administrator to place the second settlement proposal before the Committee of Creditors (CoC). Consequently, the appeal by Union Bank of India was admitted, indicating serious reservations about the procedural handling of the settlement proposals.

Analysis

Precedents Cited

The judgment references several prior cases and statutory provisions to establish the framework within which settlement proposals must operate. Notably, the Tribunal examined the Insolvency and Bankruptcy Code, 2016, specifically Sections 12A and 29A, which outline the CIRP against financial service entities and the eligibility criteria for promoters, respectively.

The Tribunal also considered the Reserve Bank of India Act, 1934, particularly Section 45-1E, which empowers the RBI to suspend the Board of Directors of a corporate debtor and appoint an Administrator. These precedents collectively influenced the Tribunal's stance on the impropriety of the settlement proposals in question.

Legal Reasoning

The core of the Tribunal's legal reasoning centers on the adherence to IBC provisions governing CIRP. The original promoter, Kapil Wadhawan, was deemed ineligible under Section 29A of the IBC, which disqualifies certain categories of promoters from initiating CIRP. Furthermore, the settlement proposals submitted did not align with the procedural requirements of Section 12A, which mandates strict compliance for the acceptance of settlement plans during CIRP.

The Tribunal highlighted that the Adjudicating Authority overlooked critical aspects, such as the non-compliance of the settlement proposals with IBC norms and the requisite no-objection from the regulator (RBI) under Rule 5(d)(iii) of the F.S.P. Rules. This oversight undermined the integrity of the CIRP, prompting the Tribunal to admit the appeal and recommend a stay on the impugned orders pending further deliberation.

Impact

This judgment underscores the paramount importance of strict adherence to the IBC's procedural and substantive requirements during CIRP. By admitting the appeal, the NCLAT has reinforced the judiciary's vigilance against attempts to circumvent insolvency norms through non-compliant settlement proposals.

For financial institutions and corporate entities alike, the ruling serves as a cautionary tale to ensure that all resolution strategies and settlement proposals are meticulously aligned with the statutory framework. Future cases will likely reference this judgment to adjudicate on the legitimacy of settlement proposals and the proper invocation of IBC provisions.

Complex Concepts Simplified

Corporate Insolvency Resolution Process (CIRP)

CIRP is a structured process under the IBC aimed at resolving a company's financial distress through reorganization and restructuring. It involves multiple stakeholders, including creditors, the corporate debtor, and regulatory bodies like the RBI.

Settlement Proposal

A settlement proposal is a plan put forth by the debtor or its promoters to settle outstanding dues with creditors, often as an alternative to formal insolvency proceedings. Under the IBC, such proposals must comply with specific legal and procedural criteria to be considered valid.

Section 12A of IBC

This section pertains to the initiation of CIRP against financial service providers. It outlines the conditions and procedures that must be followed, ensuring that only eligible entities undergo the insolvency process under regulatory oversight.

Rule 5 of F.S.P. Rules

Rule 5 governs the insolvency proceedings of financial service providers, detailing the roles of regulatory bodies, the appointment of administrators, and the procedures for resolution plans and settlement proposals.

Conclusion

The Union Bank Of India v. Kapil Wadhawan And Others judgment serves as a critical interpretative guide for the implementation of the IBC's provisions concerning CIRP and settlement proposals. By challenging the admissibility of non-compliant settlement proposals and emphasizing adherence to statutory requirements, the NCLAT has fortified the procedural integrity of insolvency resolutions.

This landmark decision not only clarifies the boundaries within which settlement proposals must operate but also reinforces the judiciary's role in upholding the legislative intent of the IBC. Legal practitioners and corporate entities must heed the implications of this judgment to navigate the complexities of insolvency and restructuring with due diligence and conformity to established legal frameworks.

Case Details

Year: 2021
Court: National Company Law Appellate Tribunal

Judge(s)

A.I.S. CheemaChairpersonV.P. Singh, Member (Technical)

Advocates

Mr. Tushar Mehta, Solicitor General of India, Mr. Shyam Divan, Sr. Adv. Mr. L. Viswanathan, Mr. Raunak Dhillon, Mr. Animesh Bisht, Mr. Abhijeet Das, Ms. Richa Ray, Ms. Saloni Kapadia, Mr. Aditya Marwah, Mr. Shubhankar Jain, Advocates, ;Mr. Sudipto Sarkar, Mr. JJ Bhatt, Mr. JP Sen, Sr. Advocates with Mr. C Rashmikant, Mr. Rohan Dakshini, Mr. Vishesh Malviya, Ms. Shweta Jaydev, Mr. Prakhar Paresh, Mr. Bhavin Shah, Ms. Pooja Vasandani, Mr. Mahesh Agarwal, Mr. Divyand Gobind Chandiramani and Mr. Himanshu Satija, Advocates for R-1;Mr. Ravi Kadam, Sr. Advocate with Mr. Liz Mathew, Mr. Rohan Rajadhyaksha, Mr. Navneet R. and Ms. Sonali Jain, Advocates for R-2;Mr. Vivek Shetty, Advocate for R-3;Mr. Ashish Virmani for FD Holders of DHFL Ms. Supragya;Dr. Abhishek Manu Singhvi and Dr. Mustafa, Sr. Advocates with Mr. Avishkar Singhvi, Mr. Ashish Bhan, Mr. Ashwyn Mishra, Mr. Ankush Goyal, Ms. Chitra Rentala, Mr. Aayush Mitruka, Mr. Samriddhi Shukla and Mr. Anirudh Krishnaa, Advocates for SRA.

Comments