NCLAT upholds NHB's special rights under Section 16B during insolvency proceedings, ruling tagged receivables held in trust

NCLAT dismissed appeal challenging NCLT order recognizing NHB's special rights under Section 16B of NHB Act during CIRP of DHFL. Tribunal held that tagged receivables from refinanced loans are held in trust by corporate debtor for NHB, not debtor's assets subject to moratorium. NHB distinguished from ordinary financial creditors as development finance institution with sui generis statutory rights. Section 16B creates trust relationship where corporate debtor acts as custodian for NHB's benefit. Court ruled no conflict exists between NHB Act provisions and IBC, as trust assets fall under Rule 10 exception to moratorium under Section 14.

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Issues Involved:
1. Whether the Adjudicating Authority erred in holding that NHB is entitled to any rights under section 16B of the NHB Act after the commencement of CIRP against DHFL when such rights are in direct conflict with the express provisions of the Code.
2. Is the relationship between DHFL and NHB that of a debtor and creditor, and no special rights can be afforded to NHB other than as a financial creditorRs.
3. Whether the Adjudicating Authority erred in holding that the Tagged Receivables are third-party assets.

Detailed Analysis:

1. Entitlement of NHB under Section 16B of the NHB Act Post-CIRP Commencement:
The Tribunal held that Section 16B of the NHB Act unequivocally provides that any sums received by the borrowing institution in repayment or realization of loans and advances financed or refinanced either wholly or partly by the National Housing Bank shall be deemed to have been received by the borrowing institution in trust for the National Housing Bank. Such sums must be paid by the borrowing institution to the National Housing Bank. The funds with the Corporate Debtor, to the extent they relate to the earmarked/flagged loans refinanced by NHB, are impressed with a trust and are held "in trust" for NHB's benefit. The Corporate Debtor cannot use these tagged loans or recoveries for its purposes or treat them as its property, disregarding the statutory provision under Section 16B of the NHB Act. Therefore, these amounts are required to be paid to NHB, and the Corporate Debtor is bound to act as per the mandate of the NHB Act.

2. Relationship Between DHFL and NHB:
The Tribunal observed that the relationship between DHFL and NHB is not merely that of a debtor and creditor. NHB is a development financial institution lending to housing finance institutions, and its exposure is not purely on commercial lines like any other commercial bank. NHB is an integral partner in formulating and implementing India's housing and housing finance policies. Section 16B of the NHB Act creates a statutory trust over the tagged receivables, and these rights are not in conflict with the express provisions of the Code. The Tribunal emphasized that equating NHB with other financial creditors when the statute places it in a special category of institutions would be a misplaced conclusion.

3. Tagged Receivables as Third-Party Assets:
The Tribunal clarified that the funds with the Corporate Debtor to the extent they relate to the flagged loans refinanced by NHB are impressed with a trust and are held in trust for the benefit of NHB. These are third-party assets, i.e., they belong to NHB, and the Corporate Debtor was collecting the same from its owners in trust for NHB. The Corporate Debtor cannot use these realizations for its benefits as if it is the owner of the same when it has availed refinance against these very tagged loans. The Tribunal also referred to the judgment of the Hon’ble Supreme Court in the case of Municipal Corporation of Greater Mumbai vs. Abhilash Lal, where it was held that Section 238 of the Code could be of importance when the properties and assets are of a debtor and not when a third party like MCGM is involved. Similarly, in the present case, the tagged receivables are third-party assets held in trust for NHB, and Section 238 of the Code is not applicable.

Conclusion:
The Tribunal concluded that the relationship between DHFL and NHB is not merely that of a debtor and creditor, and NHB has special rights under Section 16B of the NHB Act. These rights are not in conflict with the express provisions of the Code. The tagged receivables are third-party assets held in trust for NHB. The appeal was dismissed, and the impugned order of the Adjudicating Authority was upheld.

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