[Harsh Bansal is a 4th year B.A., LL.B. (Hons.) student at Rajiv Gandhi National University of Law]
On 1 April 2025, the Supreme Court (SC) in Piramal Capital & Housing Finance Ltd. v. 63 Moons Technologies Ltd.(PCHFL), albeit as an ancillary issue, answered the question of who benefits from recoveries in fraudulent or wrongful trading transactions under the Insolvency and Bankruptcy Code, 2016 (IBC). The case arose from the resolution plan for Dewan Housing Finance Corporation Ltd. (DHFL), wherein the successful resolution applicant (SRA), Piramal Capital, was permitted by the committee of creditors (CoC) to retain the potential recoveries from transactions deemed fraudulent and wrongful under section 66 of the IBC (section 66 recoveries) which were assigned INR 1 as notional value. This arrangement raised significant concerns about whether such benefits were being diverted away from creditors and unfairly absorbed by the resolution applicant (RA).
The SC upheld the CoC’s decision, emphasizing that it reflected a commercial bargain struck between the creditors and the RA and was thus a manifestation of commercial wisdom underlying the Code. With this, SC cleared the air regarding the treatment of section 66 recoveries. Additionally, the Court clarified the difference between applications under section 66 and applications under Chapter III of the IBC and how they demand distinct treatment.
This article analyses the SC’s ruling in PCHFL and situates it within the broader legal context shaped by earlier decisions. It explores how the judgment clarifies the scope of judicial review over commercial decisions taken by the CoC, and whether such decisions can divert value from creditors to the RA post-approval of the resolution plan.
Background of the Case
The dispute arose from the corporate insolvency resolution process (CIRP) of DHFL. As per the audit report, there were multiple preferential, undervalued, fraudulent, and extortionate (PUFE) transactions undertaken by DHFL during the relevant period (PUFE includes both section 43-51 and 66 transactions). While the CIRP was ongoing, the resolution professional (RP) filed 8 applications for PUFE transactions before the NCLT for INR 45,050 Crores. While the applications were pending, the RP released the request for resolution plan (RFRP). After thorough discussion and negotiation, Piramal Capital emerged as the SRA. The plan granted Piramal Capital the right to pursue and appropriate the section 66 recoveries for itself after the approval.
63 Moons Technologies Ltd. (63 Moons), a fixed deposit holder of DHFL, challenged the resolution plan’s treatment of section 66 recoveries. It argued that such recoveries, being assets of the corporate debtor (CD), should be for the collective benefit of creditors and not the RA.
The National Company Law Tribunal (NCLT), Mumbai Bench, approved the resolution plan, holding that the commercial wisdom of the CoC must be respected and that no illegality or procedural infirmity had been demonstrated since all the mandatory contents were present. It further observed that the rights over section 66 recoveries proceedings could be dealt with in the manner provided under the resolution plan as decided by the CoC and the RA, especially since such rights are contingent and uncrystallised at the time of resolution.
On appeal, the National Company Law Appellate Tribunal (NCLAT) affirmed the NCLT’s decision, holding that section 66 does not prohibit the RA from retaining potential recoveries, provided the CoC has consciously agreed to such treatment as part of the commercial bargain.
Dissatisfied with the orders of the NCLT and NCLAT, 63 Moons approached the SC contending that the resolution plan unfairly diverted potentially valuable recoveries away from the creditors, in contravention of the statutory scheme and public interest underlying the IBC.
Holdings of the SC
In its decision, the SC upheld the resolution plan submitted by Piramal Capital.
The SC emphatically rejected 63 Moon’s arguments that the depositors of DHFL were the rightful beneficiaries of monies siphoned off through fraudulent transactions and that allowing the RA to retain such recoveries would result in unjust enrichment.
The Court first clarified that recoveries under section 66 are not analogous to those under sections 43 to 51 of Chapter III (Chapter III recoveries) and that both types of transactions are not to be treated alike. While Chapter III transactions are classified as avoidance transactions sensu stricto while section 66 stands apart as a distinct provision aimed at attributing personal liability for fraudulent and wrongful trading and restoring the same.
Accordingly, the SC held that there was nothing improper about the CoC’s decision to assign a notional value of INR 1 to the section 66 recoveries and allow the RA to retain it. The Court reiterated its settled jurisprudence from Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and. Others (Essar) and India Resurgence ARC (P) Ltd. v. Amit Metaliks Ltd. (India Resurgence), affirming that judicial review does not extend to questioning the commercial wisdom of the CoC unless the resolution plan contravenes the law.
Analysis
The broader controversy over who should benefit from recoveries arising out of PUFE applications first gained judicial traction with Delhi High Court’s (DHC) Venus Recruiters (P) Ltd. v. Union of India (Venus) judgement where the Single Judge was primarily tasked with determining whether PUFE applications pending before the adjudicating authority (AA) could continue to be prosecuted by the RP after approval of the resolution plan. While the principal issue before the Court concerned the competence of the RP, the judgment also touched upon a more contentious and far-reaching question: who is entitled to the recoveries of such transactions?
In its ruling, the Court held that the RP becomes functus officio upon approval of the resolution plan and that recoveries from PUFE applications must enure to the benefit of creditors rather than the RA. This observation sparked significant concern across the insolvency circles as it virtually stalled adjudications of these PUFE proceedings post-approval of the Plan and encroached upon the CoC’s commercial competence.
However, the Division Bench (DB) of the DHC in Tata Steel BSL Ltd. v. Venus Recruiter (P) Ltd. (Venus appeal) took up the matter and reversed the Venus judgement. The DB clarified that PUFE proceedings are independent of the CIRP and can run parallel to the resolution process. However, on the ancillary issue of entitlement to recoveries, the DB maintained that recoveries from PUFE transactions must flow to the creditors, as the object of such actions is to restore value that was improperly siphoned from the estate of the CD which belongs to the creditors.
However, while the Venus appeal was under adjudication, the issue of entitlement of recoveries was also dealt with in 63 Moons Technologies Ltd. v. Administrator of Dewan Housing Finance Corporation Ltd. (DHFL NCLAT), where the NCLAT took a position diverging from Venus. Distinguishing the facts and context of the DHFL resolution, the NCLAT upheld the primacy of the CoC’s commercial wisdom, holding that it was well within the CoC’s discretion to allow the section 66 recoveries to accrue to the RA. It concluded that Venus could not serve as a restriction on such an arrangement, particularly when the creditors had knowingly approved it.
The NCLAT’s decision was appealed before the SC in PCHFL where the Court had the opportunity to canvass the arguments raised across the Venus, Venus Appeal, and DHFL NCLAT judgments. On close examination, three core insights emerge from the final judgement.
First, when the CoC allows the RA to retain the section 66 recoveries, that decision is beyond judicial scrutiny as it reflects a deliberate commercial bargain, formed with full knowledge that such claims involve uncertainty. In PCFHL,the bid amount was enhanced to ₹37,250 crores, accounting for this speculative upside, which was duly approved by an overwhelming majority of 93.65%. This cannot be second-guessed on the basis of equity.
Second, the proposition that section 66 recoveries must necessarily benefit creditors finds no absolute footing in any past jurisprudence except Venus and Venus appeal. Nonetheless, now the Apex Court has clarified that as long as the resolution plan transparently discloses the treatment of such recoveries and secures the CoC’s consent, the arrangement will not be considered illegal.
Third, the argument that the RFRP (in DHFL’s CIRP) mandated the distribution of all avoidance recoveries – including both Chapter III recoveries and section 66 recoveries – among the financial creditors (FCs) is fallacious. As interpreted by the SC, the mandatory requirement pertains solely to Chapter III recoveries and not section 66 recoveries as the legislative intent was to treat both distinctly. Therefore, allowing the RA to retain section 66 recoveries cannot be considered a breach of the RFRP.
This ultimately reinforces the settled principle that the commercial wisdom of the CoC is paramount in matters of insolvency resolution. Building on precedents of Essar and India Resurgence, the Court reiterated that judicial intervention is impermissible unless a resolution plan is palpably perverse or in contravention of the express provisions of the IBC. So long as the plan satisfies the requirements under section 30(2), the CoC’s decisions regarding valuation, distribution, and treatment of recoveries must be respected.
Support for this interpretive stance is also found in the Report of the Insolvency Law Committee dated May 2022, which addressed the issue of distribution of recoveries from PUFE transactions. While the Committee acknowledged that such recoveries are ideally meant to restore value to the creditor pool, it stopped short of prescribing a mandatory rule. Instead, Paragraph 2.29 of the Report suggested that the AA, when exercising powers under section 66, ought to consider the CoC’s commercial decisions before directing the manner of distribution. This implicitly recognises that there may be legitimate, commercially driven reasons for permitting such recoveries to be retained by the RA.
Conclusion
In a continuing line of decisions affirming the primacy of the CoC’s wisdom, the SC’s ruling in PCHFL reiterates the foundational legislative intent of the IBC to prioritise commercial outcomes over judicial notions of equity. More significantly, the Court has, perhaps for the first time, conclusively addressed the debate surrounding the treatment of section 66 recoveries. The CoC in its commercial wisdom can allocate or assign these proceeds as they see fit, provided the treatment is disclosed and forms part of the approved Plan. That said, the civil appeal (TATA Steel Ltd. v. Venus Recruiter (P) Ltd.) against the Venus Appeal is still pending, and its outcome may shape the future treatment of PUFE recoveries. Until then, PCHFL stands as a definitive yet evolving position on the commercial discretion of CoC available under the IBC, especially regarding section 66 recoveries.
– Harsh Bansal
