Rs 22,000 cr-debt, Rs 6.25 cr payout: HDFC, LIC fight Subhash Chandra's pay plan

LIC Housing Finance plans to approach the National Company Law Appellate Tribunal (NCLAT) and is also considering seeking intervention through the National Housing Bank, while HDFC Bank is exploring an appeal against the order.

In Short

• HDFC Bank, LIC Housing Finance to challenge NCLT approval at NCLAT
• Plan backed by 80.8% creditors despite objections from major lenders
• Approved plan binding on all creditors, dissenters free to appeal

Subhash Chandra, founder and chairman emeritus of the Essel Group, is facing a fresh challenge to a debt repayment plan that would see him pay Rs 6.25 crore against claims of around Rs 22,006 crore. HDFC Bank and LIC Housing Finance are preparing to challenge the National Company Law Tribunal's (NCLT) approval of the plan, reported The Economic Times.

The repayment plan envisages around Rs 1,494 crore from the principal borrowers, while Chandra's personal contribution is Rs 6.25 crore.

LIC Housing Finance plans to approach the National Company Law Appellate Tribunal (NCLAT) and is also considering seeking intervention through the National Housing Bank, while HDFC Bank is exploring an appeal against the order.

Subhash Chandra is the chairman associated with the Essel/Zee group of companies. The insolvency proceedings against him relate to his role as a personal guarantor for borrowings taken by several Essel/Zee-linked companies.

According to government officials cited by ET, Chandra did not personally borrow Rs 22,000 crore. Instead, the amount represents the total claims admitted against him in his capacity as personal guarantor for debt raised by the principal borrowers.

In simple terms, companies linked to the Essel/Zee group borrowed money from lenders, and Chandra provided guarantees backing some of those borrowings. When the borrowers faced difficulties in meeting their obligations, lenders pursued the guarantees as well, leading to the insolvency proceedings against Chandra.

The principal borrowers remain separately liable for the underlying debt.

The repayment plan therefore has two components: around Rs 1,494 crore from the principal borrowers and Rs 6.25 crore from Chandra personally.

As per the report, only Rs 2,574 crore of the admitted claims relate to loans where Chandra's personal guarantee was provided at the time of the original borrowing. The government officials said most of the other guarantees were given later as additional security.

WHY IS THE RS 6.25 CRORE PAYOUT BEING CHALLENGED?

The main point of contention is the size of the payment that Chandra is making under the plan.

LIC Housing Finance had opposed the repayment plan, arguing that a payment of Rs 6.25 crore against admitted claims of approximately Rs 22,006 crore was too small.

The lender's admitted claim alone stood at Rs 1,322.39 crore. Under the proposed plan, it was set to receive just Rs 38.09 lakh, according to the earlier NCLT order. That worked out to roughly 0.028% of its admitted dues.

Several other lenders also opposed the plan. These included HDFC Bank, Axis Bank, Canara Bank, RBL Bank and Union Bank.

HDFC Bank has now confirmed that it had opposed and voted against the resolution and is exploring filing an appeal before the NCLAT, ET reported.

LIC Housing Finance has decided to challenge the NCLT ruling before the appellate tribunal and is also planning to seek intervention through the National Housing Bank, according to people cited by ET.

80.8% OF CREDITORS BACKED THE PLAN

This is at the heart of the dispute.

Although several major lenders opposed the proposal, the repayment plan received 80.8% of the voting share of the Committee of Creditors.

The NCLT had earlier noted that the objecting creditors together held less than 20% of the voting share, while the plan had secured 80.81% support.

The tribunal therefore rejected the objections raised by the dissenting lenders and approved the repayment plan under Section 114 of the Insolvency and Bankruptcy Code.

The NCLT also held that its role was not to replace the commercial judgment of the creditors or decide whether the amount offered under the plan was adequate, as long as the decision operated within the statutory framework.

WHY DID NCLT ACCEPT SUCH A SMALL PAYMENT?

The tribunal's reasoning goes beyond the Rs 6.25 crore figure.

According to the NCLT order, the resolution professional's valuation showed that Chandra's personal estate was worth significantly less than the amount proposed under the plan.

The tribunal also reasoned that rejecting the plan could leave Chandra facing bankruptcy, which would not necessarily improve the lenders' chances of recovery.

If his insolvency were resolved and he was able to get back on his feet, the objecting creditors could potentially have a better chance of recovering money directly from the principal borrowers.

In other words, the tribunal was looking not only at what lenders were being offered immediately but also at the likely recovery prospects if the repayment plan was approved.

WHAT HAPPENS TO CREDITORS WHO OPPOSED IT?

This is now the key question following the planned appeals.

The NCLT order said an approved repayment plan is binding on all creditors covered by it, whether they voted in favour or against it. Dissenting creditors cannot simply ignore the approved plan and pursue recovery of their original claims separately, the tribunal held.

That is one reason the proposed appeals by HDFC Bank and LIC Housing Finance are significant. They are challenging the NCLT's approval of the plan even though the required majority of creditors had voted in favour.

The next stage will therefore move the dispute to the appellate forum, where the dissenting lenders can challenge the NCLT's decision.

SO IS CHANDRA PAYING RS 6.25 CRORE AGAINST RS 22,000 CRORE?

The Rs 22,006 crore is the total amount of claims admitted against Chandra as a personal guarantor for borrowings by Essel/Zee-linked companies. It is not a Rs 22,000 crore personal loan taken by Chandra.

The approved plan envisages approximately Rs 1,494 crore from the principal borrowers and Rs 6.25 crore from Chandra as personal guarantor.

That explains why government officials cited by ET have cautioned against describing the case simply as banks taking a 99.97% haircut on Rs 22,000 crore of loans because of Chandra's Rs 6.25 crore payment. The underlying borrowing and the personal guarantee are legally distinct.

"Subhash Chandra did not personally borrow Rs 22,000 crore. The figure represents the total claims admitted against him as a personal guarantor for debt borrowed by several Essel/Zee-linked companies," said one of the officials mentioned in the report.

"The principal borrowers remain separately liable. The repayment plan envisages around Rs 1,494 crore of payments by the principal borrowers, in addition to Rs 6.25 crore from Chandra personally," he added.

- Ends