Delhi High Court Seeks RBI, Centre, DHFL Response On Plea Against Rules Allowing NBFCs Resolution Under IBC

The Delhi High Court has sought responses of inter alia, the Centre, the Reserve Bank of India and Dewan Housing Finance Corporation Ltd (DHFL) on a writ petition challenging the constitutional validity of the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019, and a notification by the Union of India which had made non-banking financial corporations (NBFCs) eligible for insolvency resolution under the Insolvency and Bankruptcy Code, 2016.

The petition, a claimed public depositor to DHFL, states that the rules and the notification resulted in the first ever IBC proceedings being initiated against a financial institution, with proceedings initiated against DHFL. The petitioner states that this resulted in about 77,000 depositors losing substantial amount of their deposits to DHFL.

The petition has been moved by one Sasakawa-India Leprosy Foundation, which is a registered Public Charitable Trust engaged in providing education, livelihood and advocacy for leprosy affected people in India. The foundation claims to be a public depositor having fixed deposits in DHFL. It claims that the interest accruing from these FDs was intended to be applied towards various charitable purposes.

DHFL's Board of Directors was superceded by the RBI in November 2019, following which, according to the petitioner Foundation, it was incumbent upon the RBI to resolve the company in exercise of its powers under Section 45-MBA of the Reserve Bank of India Act, 1934 (RBI Act) and to give effect to the provisions of Section 45-QA (1) which guarantees repayment of deposits to depositors of NBFCs.

The foundation claims that in derogation of this provision, the RBI applied for insolvency resolution of DHFL under the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019.

The foundation claimed that while depositors of NBFCs/housing finance institutions are otherwise guaranteed repayment of their deposits under Section 45-QA of the RBI Act and Section 36-A of the National Housing Bank Act, 1987, it had been constrained, alongwith similarly placed public depositors to participate in the IBC process as the Code bars any other proceedings for the recovery of any outstanding amounts from DHFL during the moratorium imposed during the corporate insolvency resolution process or thereafter.

According to the plea, the amount owed to public depositors of DHFL comprised of about 6% of the total amount outstanding to all of DHFL's financial creditors, and consequently, the class of public depositors were only a marginal minority on the Committee of Creditors of DHFL comprising of large banks and financial institutions.

Consequently, it said, the CoC of DHFL approved a resolution plan for the company with nearly 94% majority favouring a distribution mechanism whereby only 20-25% of the amounts owed to the public depositors was resolved to be repaid.

The class of public depositors including the Foundation voted against this distribution mechanism, and the Foundation moved the Delhi High Court through the present petition being gravely aggrieved by the "unconscionable and arbitrary manner in which the Impugned Rules were invoked in respect of DHFL by the RBI, resulting in depletion of 75-80% of the total amount recoverable by the Foundation from DHFL."

Mr. Rony O. John, Mr. Piyush Swami and Mr. Arshdeep Singh, and Mr. Deep Roy, Advocates, represented the Petitioner.