Dissenting Creditor Entitled to an Amount Equivalent to the Security Interest

In DBS Bank Limited, Singapore v. Ruchi Soya Industries Limited and Another (2024 INSC 14), decided on Jan 3, 2024, the Supreme Court held that Section 30(2)(b) of the Insolvency Bankruptcy Code, 2016 (IBC) protects the rights of dissenting financial creditors in objecting to the manner of distribution of proceeds and assures them the sum equivalent to the security interest, if the Corporate Debtor has gone into liquidation.

The appellant bank had extended a secured loan of Rs. 243 crore to the corporate debtor. Subsequently, the Corporate Insolvency Resolution Process was initiated and the Committee of Creditors (CoC) approved the pari pasu distribution of the resolution plan proceeds to all the creditors, which was accepted with a 2/3rd majority. The appellant had voted against the resolution plan becoming a dissenting financial creditor.

The resolution plan was filed before the National Company Law Tribunal, Mumbai (NCLT) for approval and the appellant separately challenged the distribution mechanism of the proceeds under the resolution plan. The resolution plan was conditionally approved by the NCLT, dismissing the appellant’s challenge. The appellant challenged the dismissal in the National Company Law Appellate Tribunal (NCLAT). During the pendency of this appeal, the IBC was amended, resulting in the amendment of Section 30(2)(b)(ii) of the IBC, which states that a dissenting financial creditor should not be paid an amount less than what he or she is entitled to in case of a liquidation proceeding under Section 53(1) of the IBC. The appellant had also challenged the final approval order of the resolution plan before the NCLAT. The appeals preferred by the appellant were dismissed by the NCLAT. This dismissal was challenged by the appellant, who brought the present case to the Supreme Court.

The first issue the court dealt with was the applicability of the amendment to the appellants’ first appeal before the NCLAT, which the court decided in the affirmative. The court opined that an appellate proceeding is a continuation of the original proceeding. A change in law can always be applied to original or appellate proceedings. Thus, Explanation 2 is constitutionally valid and despite having retrospective operation, it does not impair vested rights. Only when the resolution plan, as approved, has attained finality, as no proceedings are pending, will the amendments apply to re-write the settled matter.

The second issue for consideration by the court was whether Section 30(2)(b)(ii) of the IBC, as amended in 2019, entitled the dissenting financial creditor to be paid the minimum value of its security interest. The apex court held that Section 30(2)(b)(ii) read with Section 53 of the IBC, would empower the dissenting financial creditor to obtain a value equivalent to the security interest as would have been received in the case of a liquidation proceeding, which will be provided in accordance with priority as per Section 53 of the IBC, as the creditor is secured.

The court reiterated that, as held in Essar Steel India Limited v. Satish Kumar Gupta and Ors., (2020) 8 SCC 531and a few other cases, the commercial wisdom of the CoC must be respected. Therefore, the resolution plan accepted by the requisite creditors/members of the CoC upon voting is enforceable and binding on all creditors. The CoC can decide the manner of distribution of resolution proceeds amongst creditors and Ors. but Section 30(2)(b) protects the dissenting financial creditor and operational creditors by ensuring that they are paid a minimum amount that is not less than their entitlement upon the liquidation of the corporate debtor.

Further, the code 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. However, the court observed that a dissenting financial creditor, as held in Jaypee Kensington Boulevard Apartments Welfare Association and Ors. v. NBCC (India) Limited and Ors. (2022) 1 SCC 401, is only entitled to the monetary value of the assets. The dissenting financial creditor has to statutorily forgo and relinquish his security interest on the resolution plan being accepted, and his position is the 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.

The respondent also stated that the appellant dissented to the manner of distribution of proceeds under the resolution plan and not the resolution plan in itself and thus, Section 30(2)(b)(ii) of the IBC did not apply. However, the court opined that the dissenting financial creditor cannot object to the resolution plan but can object to the distribution of the proceeds if they 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.

The court further ascertained that there was no conflict between Sub-section (4), as amended in 2019, and the amended Clause (b) to Sub-section (2) to Section 30 since one dealt with the CoC’s considerations while approving the resolution plan and the other dealt with the minimum payment to be made to an operational creditor or a dissenting financial creditor.

The court in the present case differed from India Resurgence Arc Private Limited v. Amit Metaliks Limited, (2021) 19 SCC 672 and thus referred the case to a larger bench.