Securing the rights of dissenting financial creditors

In the recent case of DBS Bank Limited Singapore v Ruchi Soya Industries Limited and Anr, the Supreme Court held that in the insolvency proceedings of a corporate debtor, the dissenting financial creditors were entitled to the minimum value of their security interest. However, because of conflicting authorities, the court referred the case to a larger bench for final determination.

DBS Bank granted loan facilities of USD50 million to the corporate debtor secured by charges over immovable and other assets. In 2017, the corporate debtor entered the corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC). In 2019, the resolution plan was approved by a majority of 96.95% of the committee of creditors (CoC). DBS opposed the resolution, becoming a dissenting financial creditor. It challenged the plan in the National Company Law Tribunal (NCLT) on the ground that the distribution mechanism did not take into account the liquidation value of its security. The NCLT granted provisional approval to the resolution plan, dismissing DBS’s application. DBS appealed to the National Company Law Appellate Tribunal (NCLAT).

While the appeal was pending in the NCLAT, section 30(2)(b) of the IBC was amended to provide that dissenting financial creditors should be paid an amount not less than the amount paid to such creditors in a liquidation of the corporate debtor under section 53(1) of the IBC. The NCLAT dismissed DBS’s appeal and the bank appealed to the Supreme Court.

The key issue was the interpretation of the amendment to section 30(2)(b)(ii) of the IBC. The court held that dissenting creditors must be paid the value of their security interest during the CIRP. The court cited a number of judgments in support, including Committee of Creditors of Essar Steel India Limited v Satish Kumar Gupta and Ors and Jaypee Kensington Boulevard Apartments Welfare Association and Ors v NBCC (India) Limited and Ors.

In so finding, the court dissented from the decision of a similar two-judge bench of the same court in India Resurgence ARC Private Limited v Amit Metaliks Limited and Anr. That case held that the dissenting secured creditor lacked standing to challenge an approved resolution plan because a greater amount should be distributed to take into account the security interest held by it in the corporate debtor’s asset. The court in the present case held that the object of the amendment to section 30(2)(b) was to protect the minority autonomy of the creditors. The dissenting financial creditors were to be protected from being forced to settle for a lower amount payable under the resolution plan.

While a CoC has the power to decide the manner of distribution of resolution proceeds based on its commercial wisdom, amended section 30(2)(b)(ii) assures that the dissenting financial creditors will receive the same amount as they would have received in the liquidation proceedings, that is a minimum value equivalent to the value of their security interest. The court rejected the argument that section 30(2)(b)(ii) was unworkable during the CIRP, finding that the dissenting financial creditor statutorily relinquished its security interest on acceptance of the resolution plan. It also held that section 53(1) is referred to in section 30(2)(b)(ii) only to ensure that dissenting financial creditors receive the amount of value of their security interest. Section 53 does not apply in its entirety.

The court also rejected the respondent’s submission that there is a conflict between the amendment to section 30(2)(b) and section 30(4). The latter provides that the CoC may approve the resolution plan by 66% of the votes of the financial creditors. It held that while section 30(4) sets out matters for the CoC to consider in approving a resolution plan, including feasibility, viability and distribution methods, it does not require each assenting party to be given liquidation value. There is no conflict because section 30(2)(b)(ii) relates to the minimum payment for an operational or dissenting financial creditor.

The court’s decision in protecting the rights of dissenting financial creditors is surely correct, otherwise the purpose of the IBC will be thwarted by making liquidation preferable for secured creditors. Referring the matter to a larger bench will confirm an unchallenged effective and fair resolution mechanism.

Nishtha Arora is a principal associate and Srishti Bansal is an associate at SNG & Partners.