RBI APPOINTED ADMINISTRATOR OF DHFL CALLS FOR THE FIRST COMMITTEE OF CREDITORS MEETING

1. Dewan Housing Finance Corporation Ltd. (DHFL), the third largest pure play company focused on mortgage, is the first non-banking financial organization to face the corporate insolvency resolution process under the newly introduced rules under Section 227 of the Insolvency and Bankruptcy Code (IBC).
2. Owing to governance issues and acute liquidity crisis, the Reserve Bank of India (RBI) superseded DHFL and subsequently referred the mortgage lender to the Mumbai bench of the National Company Law Tribunal (NCLT).
3. The RBI on November 20th, 2019 had appointed R Subramaniakumar, the former managing director and CEO of Indian Overseas Bank as the company’s administrator.

R Subramaniakumar, RBI appointed administrator, on December 29th, 2019 called for a committee of creditor’s meeting. After the DHFL was admitted into the NCLT under IBC, this will be the first creditor committee meeting to be held under the IBC. The meeting is expected to see wide representations from DHFL’s creditors, including banks, mutual funds, insurance companies and pension funds and various kinds of lenders who had exposure to DHFL.

Broadly speaking, the agenda of the meeting is expected to include and answer questions like – How to restart the business of the company on a smaller scale whilst ensuring that the same is viable and also to check the status of claims as submitted against DHFL. The administrator is also expected to discuss timelines so that the claims are settled at the earliest.

As of July 2019, the claims have been suggested to be over Rupees 86,000 crore from financial creditors alone and another Rupees 60 crore from operational creditors. Additionally, the State Bank of India (including SBI Singapore) has been devised to be the largest lender with a claim over Rupees 10,000 crore, succeeded by Bank of India, Canara Bank, National Housing Bank, Union Bank of India, Syndicate Bank and Bank of Baroda. However, the figures do not include holders of fixed deposits (FD) to whom DHFL owed an amount well over Rupees 6,000 crore as on 6th July.

Curiously, Subramaniakumar has also received claims of about Rupees 960 crores from a class of four real estate companies. These have been categorized as “creditors other than financial and operational creditors”. The largest claim of these is from Neelkamal Realtors Tower Pvt. Ltd., being a claim of around Rupees 760 crore.

Parallelly, banks are expected to consider taking the promoters of DHFL, the Wadhawans, to the NCLT for their personal guarantee against loans given to DHFL. This step comes after the Ministry of Corporate Affairs (MCA) had recently extended the scope of IBC to personal guarantors to corporate debtors (effectuating December 1st, 2019). Both the processes, the personal guarantee claim and the Corporate Insolvency Resolution process, are expected to run simultaneously. As per DHFL’s annual report for 2019, the promoters of the company had given personal guarantees for over Rupees 82,000 crores of loans on the books of the company, including on secured non-convertible debentures of Rupees 42,344 crore; on bank term loans for about Rupees 32,000 crore ; on term loans from National Housing Bank worth Rupees 2,435 crore and Rupees 2,800 crore on foreign debt.

The appointed administrator, R Subramaniakumar, the former managing director and CEO of the Indian Overseas Bank, had been appointed as the administrator for DHFL by the RBI. A three-member panel, including Rajiv Lall (Non-executive chairman, IDFC First Bank), NS Kannan (Managing Director and CEO at ICICI Prudential Life Insurance) and NS Venkatesh (Chief Executive of the Association of Mutual Funds in India), has also been appointed by the RBI to advise Subramaniakumar on the matter.

WHAT WERE THE RULES ISSUED BY THE GOVERNMENT UNDER SECTION 227 OF THE IBC?

The MCA, on November 16th, 2019 notified the Insolvency and Bankruptcy Rules, 2019. These rules have been issued under Section 227 of the IBC which allows the Central Government to notify Financial Service Providers (FSPs) or categories of FSPs for the purpose of insolvency and liquidation proceedings.

The rules provide for a generic framework for insolvency proceedings of systematically important Financial Service Providers (FSPs). The rules have opened doors for resolution of stressed non-banking finance companies. Under the rules, the IBC can be invoked to account for resolution for stressed finance companies such as DHFL. These rules will not be applicable to banks.