Is Dissenting Financial Creditor Entitled To Be Paid Minimum Value Of Its Security Interest?: Supreme Court Refers Matter To Larger Bench

Whether Section 30(2)(b)(ii) of the Insolvency and Bankruptcy Code, 2016 , as amended in 2019, entitles the dissenting financial creditor to be paid the minimum value of its security interest? The Supreme Court has referred this issue to a larger bench.

The Court noted the perceived conflict with Section 30(2)(b)(ii) applies to the minimum payment for operational or dissenting financial creditors who do not vote in favour of the scheme, with operational creditors lacking the right to vote.

The Court expressed disagreement with certain aspects of the views presented in the case of India Resurgence ARC Private Limited v. Amit Metaliks Limited & Another [2021 SCC Online SC 409].

While acknowledging that voting is a matter of the commercial wisdom of the Committee of Creditors (CoC) and that a dissenting secured creditor cannot demand a higher amount, the Court noted that this does not negate the right of such a creditor to receive payment equal to the value of the security interest under Section 30(2)(b)(ii) of the Code.

The Bench comprising Justice Sanjiv Khanna and Justice S.V.N. Bhatti observed, “In view of the aforesaid discussion, and as we are taking a different view and ratio from India Resurgence ARC Private Limited (supra) on interpretation of Section 30(2)(b)(ii) of the IBC, we feel that it would be appropriate and proper if the question framed at the beginning of this judgment is referred to a larger Bench. The matter be, accordingly placed before the Hon’ble the Chief Justice for appropriate orders”.

Advocate Anindita Roy Chowdhury appeared for the Appellant and Senior Advocate Krishnan Venugopal appeared for the Respondent.

DBS Bank extended a financial debt of USD 50 million to Ruchi Soya Industries Limited (Corporate Debtor), which underwent a Corporate Insolvency Resolution Process (CIRP). DBS Bank's Rs. 242.96 crore claim was admitted. Patanjali Ayurvedic Limited proposed a resolution plan for Rs. 4134 crore, garnering 49.22% of total claims. DBS Bank dissented, opposing the Committee of Creditors' (CoC) approved pari passu distribution.

The National Company Law Tribunal (NCLT) provisionally approved the plan on July 24, 2019, dismissing DBS Bank's challenge. DBS Bank, a dissenting creditor, appealed to the National Company Law Appellate Tribunal (NCLAT). Amid the appeal, amendments to the Insolvency and Bankruptcy Code affected the resolution plan proceeds distribution. DBS Bank's reconsideration request was denied by the CoC. Appeals against NCLAT's dismissal, citing unjust enrichment from pro rata distribution, were made on November 18, 2019, and December 09 20191. The appellant argued deprivation of its rightful share despite amendments, led to unjust enrichment for other creditors with inferior security interests.

The Court framed the following issue: “Whether Section 30(2)(b)(ii) of the Insolvency and Bankruptcy Code, 2016 (IBC), as amended in 2019, entitles the dissenting financial creditor to be paid the minimum value of its security interest?”

The Court underscored the central issue in the appeals, which revolved around the applicability of amendments to Section 30(2) introduced by the Amendment Act from August 16, 2019. The Appellant initiated the appeal on July 31, 2019, challenging the provisional approval order issued by the NCLT on July 24, 2019.

The Court noted that Explanation 2(ii) specifically addresses the consideration of amended Section 30(2)(b) in appeals under Section 61 or 62, and Explanation 2(i) and Explanation 2(iii) extend the application of the amended clause to pending cases of resolution plan approval, rejection, or legal proceedings. Emphasizing a broad legislative intent, the Court applied the Amendment Act to proceedings before the adjudicating authority, appellate authority, or any Court handling resolution plan matters. The Court clarified that settled matters remain unaffected unless the approved resolution plan achieves finality with no pending proceedings.

Furthermore, the Court stressed the absence of vested rights for a resolution applicant with approved plans under the Insolvency and Bankruptcy Code, asserting that the change in the law reflected in Explanation 2 is constitutionally valid and, despite its retrospective operation, does not infringe upon vested rights.

Regarding the Appellant's argument based on Explanation 2(i), the Court acknowledged the merit in the contention but refrained from a firm decision, holding that the Amendment Act applied when the appeals were heard and decided by the NCLAT on November 18, 2019, and December 9, 2019, post the Amendment Act's enforcement.

On the second question, the Court delved into the interpretation of Section 30(2)(b)(ii) of the Insolvency and Bankruptcy Code, highlighting that it guarantees dissenting financial creditors a payment not less than the amount in case of corporate debtor liquidation. Recognizing the commercial wisdom of the Committee of Creditors (CoC), the Court affirmed that Section 30(2)(b) protects the rights of dissenting financial and operational creditors, ensuring they receive a minimum amount equal to their entitlement in a liquidation scenario.

The Court rejected the notion that dissenting creditors can claim preference during distribution based on dissent or assent. The Court asserted that Section 30(2)(b)(ii) ensures dissenting creditors, including operational creditors, receive an amount equivalent to what they would obtain in liquidation proceedings, safeguarding their rights and ensuring fair treatment.

The Bench clarified that dissenting secured creditors cannot propose a higher payment, and Section 30(2)(b)(ii) legally assures them an amount equal to the value of the security interest. The Court highlighted that dissenting financial creditors are entitled to the liquidation value as per Section 53(1) of the Code, emphasizing that they lose their security interest and cannot enforce it.

Addressing arguments on the workability of Section 30(2)(b)(ii) and deemed fiction regarding liquidation, the Court dismissed interpretations conflicting with legislative intent. The Bench refuted claims that the Appellant's dissent solely concerns the distribution manner, affirming that Section 30(2)(b)(ii) pertains to the dissenting financial creditor's entitlement in liquidation. The Court upheld the dissenting financial creditor's statutory right to object to the distribution of proceeds under the resolution plan, rejecting contentions about the appellant's status and the alleged conflict between Section 30(4) and the amended Section 30(2)(b).

The Court clarified that a dissenting secured creditor is entitled to the full liquidation value if dissatisfied with the proposed payout, aligning with Section 53(1). The Bench emphasized that the alleged conflict does not arise, as Section 30(2)(b)(ii) concerns the minimum payment to operational and dissenting financial creditors who do not vote in favour of the scheme.

Considering the differing interpretation of Section 30(2)(b)(ii) of the IBC compared to the India Resurgence ARC Private Limited (Supra), the Court noted it to be appropriate to refer the matter to a larger bench.

Accordingly, the Court listed the matter to a larger bench.

Cause Title: DBS Bank Limited Singapore v Ruchi Soya Industries Limited And Another (2024 INSC 14)

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