On January 31, 2020, in the matter of Vinay Kumar Mittal & Ors., the Hon’ble Supreme Court of India dismissed the appeals filed by the depositors of Dewan Housing Finance Corporation Limited (“DHFL”) challenging the interim orders passed by the Hon’ble High Court of Bombay permitting DHFL to make payments overdue or payable under the assignment agreements in favour of any or all such banks or assignees of loans. Apart from this, the depositors also challenged the decision taken by the Committee of Creditors on December 30, 2019, to commence disbursement of loans to the tune of INR 500 Cr. per month by taking into account the interests of the depositors.
The Reserve Bank of India (“RBI”) filed a petition under Rule 5 of the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (“FSP Rules”) before the NCLT, Mumbai (“Adjudicating Authority”) to initiate Corporate Insolvency Resolution Process (“CIRP”) against DHFL which was admitted on December 3, 2019. Subsequently, the administrator appointed by the Adjudicating Authority made a public announcement and after verification of the claims received, constituted the Committee of Creditors (“CoC”). The counsel representing the depositors argued that the decision taken by the Committee of Creditors on 30.12.2019 by which the Administrator was permitted to carry on the lending operations of DHFL without paying the depositors is arbitrary and illegal.
Having narrated the above facts, the Supreme Court, without going into the merits of the contentions made by the counsel representing the depositors, observed that the depositors are being represented by the authorised representative before the CoC and that it is open to raise such contentions before the CoC or the NCLT. Further, it was held that the Supreme Court is not inclined to interfere with the decision of the CoC in permitting the administrator to commence lending operations of DHFL.
Keeping this in view, a thought might arise as to what would have been the case if the Financial Resolution and Deposit Insurance Bill, 2016 (“FRDI Bill”) was enacted. Owing to the fact that DHFL is a systematically important NBFC, it would be preferred to be resolved under FRDA Bill and not under Insolvency and Bankruptcy Code, 2016 (“Code”). Where it is not notified under Section 227 of the Code, it falls within the scope of covered service provider (“CSP”) under Part-I of Schedule 2 of the FRDA Bill, in which case there wouldn’t have been any administrator nor would there be any CoC.
The FRDI Bill provided for establishment of a Resolution Corporation which shall, in consultation with the Appropriate Regulator, closely monitor the resolution of such financial service provider. One of the important obligations of the Resolution Corporation is to specify the objective criteria for classification of CSP based on its risk to viability.
Risk to Viability
Pursuant to the FRDA Bill, the Resolution Corporation shall specify the objective criteria for classification of CSP into any one of the following categories of risk to viability:
|S.No.||Risk to Viability||Objective Criteria|
|a.||Low||Pf of CSP is substantially below the acceptable Pf|
|b.||Moderate||Pf of a CSP is marginally below or equal to acceptable Pf|
|c.||Material||Pf of a CSP is marginally above acceptable Pf|
|d.||Imminent||Pf of a CSP is substantially above the acceptable Pf|
|e.||Critical||Pf of a CSP is substantially above the acceptable Pf, and the CSP is on the verge of failing to meet its obligations to its consumers|
Table 1: Risk to Viability (Pf = Probability of Failure)
The classification of a CSP by the Board or the Appropriate Regulator, as the case may be, shall be final and binding on such CSP. With the information available in public domain, we can safely assume that DHFL will be classified as critical risk to viability, in which case the following actions shall follow:
It can be understood from above that any decisions in respect of the operations of the CSP shall be taken by the Resolution Corporation and not the creditors, unlike the Code. Hence, there is a high level of accountability on account of an independent body looking into the operations of the CSP under the direct supervision of the Appropriate Regulator.
The Resolution Corporation shall devise a scheme of resolution which may involve any transfer of the assets and liabilities of CSP or acquisition, amalgamation or merger of a CSP or any combination thereof subject to condition that the proposed transferee entity has obtained the consent of the Appropriate Regulator in this regard. The terms of such scheme shall be agreed between the Corporation and such transferee entity. Such scheme may provide for the reduction of interest or rights which the members, depositors and other creditors have in or against the CSP before its resolution to such extent as the Resolution Corporation and the Appropriate Regulator considers necessary in the public interest or in the interests of the members, depositors and other creditors or for the maintenance of the business of the CSP.
Any decision of the Resolution Corporation shall be binding on the creditors, depositors and all other stakeholders. Hence, the creditors or depositors have no decision-making power under the FRDI Bill unlike the Code where the CoC has been vested with the commercial wisdom for any decision under the Code.
The other resolution tools provided under the FRDI Bill are as follows:
(a) creating a bridge service provider;
(c) liquidation; or
(d) a combination of any of the methods;
The FRDI Bill is aimed at providing a tailor-made framework to deal with distress of financial service providers unlike the Code which is a one-size-fits-all approach. IBC doesn’t differentiate much in terms of the processes based on the nature of industry in which the corporate debtor is operating. It is a pure market-driven solution, which is targeted under IBC, where certain parties are meant to lose and certain parties are meant to gain. At least that’s how markets work. Keeping this in view, a separate set of rules have been rolled out for FSPs by the Central Government but the same are completely procedural. There is a dire need for specialised framework to deal with the distressed FSPs and the framework provided under the Code cannot supplement this.
 Vinay Kumar Mittal & Ors. Vs. Dewan Housing Finance Corporation Limited & Ors., Civil Appeal No. 654-660 of 2020
 Section 48 of the FRDI Bill, 2016
 Section 49 of the FRDI Bill, 2016
 Section 48 of the FRDI Bill, 2016