Madras HC says 63 Moons’ compensation claim against DHFL auditor must be pursued through insolvency process

63 Moons Technologies Limited sued, among others, the applicant, a statutory auditor of Dewan Housing Finance Corporation Limited (DHFL), seeking approximately ₹231.6 crore in compensation, alleging that fraudulent conduct connected with DHFL’s financial information and prospectus induced its investment.

DHFL was subsequently subjected to insolvency proceedings, in which the plaintiff participated as a creditor and received approximately ₹96.83 crore under the resolution process.

The applicant sought rejection of the plaint under Order VII Rule 11 CPC, contending that the claim concerned fraudulent business conduct and any recovery should be pursued under Section 66 of the Insolvency and Bankruptcy Code, 2016 (IBC), for the benefit of the insolvency estate rather than the plaintiff alone.

The plaintiff opposed the application, including on the grounds that it had an independent claim under Section 35 of the Companies Act, 2013, and that an earlier application to reject the plaint had been dismissed.

1. Whether the plaintiff’s claim against the applicant under Section 35 of the Companies Act could proceed as an individual action, or whether, in light of DHFL’s insolvency and Section 66 IBC proceedings, the claim could only be pursued through the insolvency process for the benefit of the relevant stakeholders.

2. Whether the plaint against the applicant was liable to be rejected under Order VII Rule 11 CPC on the ground that the civil court could not adjudicate the claim.

Order VII Rule 11 CPC permits rejection of a plaint where a legal bar prevents the suit from proceeding.

Section 35 of the Companies Act, 2013 provides for civil liability to persons who suffer loss after subscribing for securities on the basis of a misleading prospectus; the Court recognised that such a claim may ordinarily be an action in personam.

Under Section 66 IBC, where the corporate debtor’s business has been carried on with intent to defraud creditors, the insolvency authority may require persons knowingly party to that conduct to contribute to the corporate debtor’s assets.

The Court also relied on the Supreme Court’s decision in Piramal Capital and Housing Finance Limited v. 63 Moons Technologies Limited and others, 2025 INSC 421, noting its account of the CoC’s decision to allocate Section 66 recoveries to the successful resolution applicant in exchange for a lump-sum resolution amount.

The Court accepted that a Section 35 claim may ordinarily be personal to an investor.

It nevertheless considered the claim here in the context of DHFL’s insolvency and the proceedings already initiated under Section 66 IBC concerning allegedly fraudulent conduct connected with the corporate debtor.

It reasoned that recovery from the applicant for that conduct would relate to assets of the corporate debtor and could not be appropriated solely by the plaintiff; the matter therefore had the character of an action in rem and belonged within the insolvency process.

The Court noted that the plaintiff, as a member of the CoC, could have brought the applicant’s alleged conduct to the attention of the insolvency professional.

It consequently held that the claim could not be adjudicated in the present suit and that the available remedy was under Section 66 IBC.

It rejected the plaint as against the applicant alone, granting the plaintiff liberty to seek appropriate relief under Section 66 IBC; the application was disposed of without costs.