IBC - Is Dissenting Financial Creditor Entitled To Minimum Value Of Security Interest? Supreme Court Refers To Larger Bench, Doubts Precedent

The Supreme Court has referred to larger bench the issue whether a dissenting financial creditor is to be paid the minimum value of its security interest as per the Insolvency and the Bankruptcy Code 2016.

A bench comprising Justices Sanjiv Khanna and SVN Bhatti, in the case DBS Bank Ltd Singapore v. Ruchi Soya Industries Ltd and another, referred the following question  : 

Whether Section 30(2)(b)(ii) of the Insolvency and Bankruptcy Code, 20161, as amended in 2019, entitles the dissenting financial creditor to be paid the minimum value of its security interest?

The bench differed from the view expressed by a coordinate bench in the 2021 judgment in the case India Resurgence ARC Private Limited v. Amit Metaliks Limited & Another which held that a dissenting secured creditor cannot challenge an approved resolution plan contending that higher amount should have been paid to it based on the security interest held by it over the corporate debtor.

The bench in the instant case observed that there was a contradiction between India Resurgence ARC Private Ltd with the ratio decidendi of the decisions of the three-Judge Bench judgments in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta(2019) and Jaypee Kensington Boulevard Apartments Welfare Association vs. NBCC (India) Ltd(2021).

In Committee of Creditors of Essar Steel India Limited, the Court had referred to UNCITRAL Legislative Guide which emphasised the need to provide approprite protection to dissenting creditors. Similar views were expressed in Jaypee Kensington also.

Referring to these precedents, the Court observed: 

"In our opinion, the provisions of Section 30(2)(b)(ii) by law provides assurance to the dissenting creditors that they will receive as money the amount they would have received in the liquidation proceedings. This rule also applies to the operational creditors. This ensures that dissenting creditors receive the payment of the value of their security interest."

The Court opined that the provision was enacted to protect the minority autonomy of creditors. "It should not be read down to nullify the minimum entitlement. Section 30(2)(b)(ii) forfends the dissenting financial creditor from settling for a lower amount payable under the resolution plan," the Court stated.

Expressing reservations about the view in India Resurgence, the Court stated :

"We have reservation on portions of the view expressed in paragraphs 17, 21 and 22 in the judgment of India Resurgence ARC Private Limited (supra). Paragraph 17 is respectfully correct in its observations when it refers to the provisions of Section 30(4) and that the voting is essentially a matter which relates to commercial wisdom of the CoC. The observation that a dissenting secured creditor cannot suggest that a higher amount be paid to it is also correct. However, this does not affect the right of a dissenting secured creditor to get payment equal to the value of the security interest in terms of Section 30(2)(b)(ii) of the Code.

Paragraph 21 in India Resurgence ARC Private Limited (supra) again in our respectful view is partially correct. It is correct to the extent that the legislature has not stipulated that the dissenting financial creditor shall be entitled to enforce the security interest. However, it is incorrect to state that the dissenting financial creditor would not be entitled to receive the liquidation value, the amount payable to him in terms of Section 53(1) of the Code. Paragraph 22 refers to the Committee of Creditors of Essar Steel (supra), which we have already quoted and is apposite to the view expressed by us. The reasoning given in the earlier portion of paragraph 22 in our respectful opinion is in conflict with the ratio in Committee of Creditors of Essar Steel India Limited (supra) as it does not take into account the legal effect of Section 30(2)(b)(ii) of the Code. While it is important to maximise the value of the assets of the corporate debtor and prevent liquidation, the rights of operational creditors or dissenting financial creditors also have to be protected as stipulated in law."

Dissenting financial creditor cannot object to the enforcement of the resolution plan

At the same time, the judgment clarified that a dissenting financial creditor cannot object to the enforcement of the approved resolution plan.

"The dissenting financial creditor cannot object to the resolution plan, but can object to the distribution of the proceeds under the resolution plan, when the proceeds are less than what the dissenting financial creditor would be entitled to in terms of Section 53(1) if the corporate debtor had gone into liquidation. This is the statutory option or choice given by law to the dissenting financial creditor. The option/choice should be respected."

The Court also rejected the argument of the respondent that Section 30(2)(b)(ii) is unworkable because it involves deeming fiction relating to liquidation, which is inapplicable during the CIRP period. It noted that the dissenting financial creditor has to statutorily forgo and relinquish his security interest on the resolution plan being accepted, and his position is same and no different from that of a secured creditor who has voluntarily relinquished security and is to be paid under Section 53(1)(b)(ii) of the Code.

"We wish to clarify that Section 53(1) is referred to in Section 30(2)(b)(ii) with the purpose and objective that the dissenting financial creditor is not denied the amount which is payable to it being equal to the amount of value of the security interest. The entire Section 53 is not made applicable," the judgment authored by Justice Sanjiv Khanna stated.

Since it was taking a contrary view from a coordinate bench's judgment, the bench said that it is proper and appropriate that the issue is referred to a larger bench. The matter be, accordingly placed before the Hon'ble the Chief Justice for appropriate orders, the judgment stated.

Case Title : DBS Bank Ltd Singapore v. Ruchi Soya Industries Ltd and another

Citation : 2024 LiveLaw (SC) 6

Click here to read the judgment