INTRODUCTION:
The treatment of dissenting secured financial creditors in a resolution plan under the Insolvency and Bankruptcy Code, 2016 ("IBC") has remained in flux for some years, on account of a fundamental dichotomy: some dissenting financial creditors have maintained that under resolution plans they should be able to access the value of their security, particularly when it is an exclusive security from the corporate debtor for facilities advanced. Resolution professionals (supported by other creditors) have maintained that all financial creditors ought to be paid in proportion to their voting share on the committee of creditors, irrespective of the value of the security they had held.
In this short piece, we analyze the judicial trends in the considering the treatment of such financial creditors, with a particular focus on the impact of the recent decision in the case of Paridhi Finvest Private Limited v. Value Infracon Buyers Association and Another (Civil Appeal (Diary) No. 14065 of 2024) ("Paridhi Finvest case").
PROVISIONS OF THE IBC:
The Bankruptcy Law Reforms Committee in its report while identifying the key economic question in a bankruptcy process noted that the only correct forum for deciding the fate of a defaulting entity is "a creditors committee, where all financial creditors have votes in proportion to the magnitude of debt that they hold"1. It did not envisage representation or payment on the basis of the security held by a financial creditor.
Section 30 of the IBC requires the Resolution Professional to confirm that any resolution plan placed before the CoC for consideration, "provides for the payment of debts of financial creditors, who do not vote in favour of the resolution plan, in such manner as may be specified by the Board, which shall not be less than the amount to be paid to such creditors in accordance with sub-section (1) of section 53 in the event of a liquidation of the corporate debtor."
Further, Regulation 38 of the IBBI (Insolvency Resolution Process of Corporate Persons) Regulations, 2016, requires a resolution plan to specify the amount payable to a dissenting financial creditor, and indicate that it shall be paid in priority over the assenting financial creditors.
The IBC also contemplates that if a corporate debtor is to be liquidated, a secured financial creditor can choose to either pursue its security outside the liquidation proceedings (in terms of Section 52); or relinquish its security and gain priority in payments over other creditors (in terms of Section 53 (1)). A secured creditor who separately enforces its claims and has remaining dues to claim from the corporate debtor comes significantly lower in the priority of payments set up by Section 53 (1).
The interpretational issue in Section 30 arises on account of the fact that in terms of the IBC, there is no specific right for a secured creditor to separately pursue its security interest while the corporate debtor is undergoing a corporate insolvency resolution process ("CIRP"), which concludes in a resolution plan. Each financial creditor, whether dissenting or not, has to depend upon the common pool of assets of the corporate debtor, against which the prospective resolution applicant would estimate its bid value.
It is worth noting that on this issue, the IBC differs from insolvency laws in other major jurisdictions– other countries have recognised rights of secured financial creditors to have access to the value of their security.2
This issue was deliberated upon by the Bankruptcy Law Reforms Committee in its report, before the enactment of IBC. The report observed that a resolution plan cannot affect the rights of a creditor who did not vote to "appropriate or enforce her security"3. However, the IBC did not make any express provision to this effect.
PRIOR JUDICIAL DECISIONS:
- Jaypee Kensington
A 3-judge bench of the Supreme Court in the matter of Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC (India) Limited,4 ("Jaypee Kensington case") considered the question of treatment of dissenting financial creditors under a resolution plan, when it dealt with the mode of payment to them. The proposed payment in the resolution plan was a proportionate share in the equity of Expressway SPV5, and transfer of certain land parcels. The dissenting creditor was dissatisfied with this mode of satisfaction of its debt.
While holding such a mode of payment to be impermissible, the Supreme Court observed that:
"164.2 We would hasten to observe that in case a dissenting financial creditor is a secured creditor and a valid security interest is created in his favour and is existing, the entitlement of such a dissenting financial creditor to receive the "amount payable" could also be satisfied by allowing him to enforce the security interest, to the extent of the value of receivable by him and in the order of priority available to him..."6
167. To sum up, in our view, for a proper and meaningful implementation of the approved resolution plan, the payment as envisaged by the second part of clause (b) of sub-section (2) of Section 30 could only be payment in terms of money and the financial creditor who chooses to quit the corporate debtor by not putting his voting share in favour of the approval of the proposed plan of resolution (i.e., by dissenting), cannot be forced to yet remain attached to the corporate debtor by way of provisions in the nature of equities or securities. In the true operation of the provision contained in the second part of sub-clause (ii) of clause (b) of sub-section (2) of Section 30 (read with Section 53), in our view, the expression "payment" only refers to the payment of money and not anything of its equivalent in the nature of barter; and a provision in that regard is required to be made in the resolution plan whether in terms of direct money or in terms of money recovery with enforcement of security interest, of course, in accordance with the provisions concerning the order of priority as also fair and equitable distribution..."7
This decision seemed to indicate that in a resolution plan, a dissenting financial creditor ought to be compensated by money; or by allowing it to enforce its security interest. This seemed to be contrary to the scheme of the IBC – adopting this course of action sets up incentives for secured creditors to dissent from resolution plans, since they would have the ability to obtain better value by enforcing their security interests.
- Amit Metaliks
Shortly thereafter, a 2-judge bench of the Supreme Court in India Resurgence ARC Private Limited v. Amit Metaliks Limited8 ("Amit Metaliks case"), was faced with a situation where against the total admitted claim of INR 13.38 crore, the appellant, a dissenting financial creditor, was offered an amount of INR 2.026 crores. This was in the same proportion and percentage as provided to other secured financial creditors with respect to their respective admitted claims. The appellant's position was that the value of its exclusive security was about INR 12 crores, and the committee of creditors ought not have approved a resolution plan which did not consider the priority and value of security interest of financial creditors.9
The Supreme Court held that a dissenting financial creditor could not make a claim for a higher amount on the basis of the value of its security interest.
It observed that "It has not been the intent of the legislature that a security interest available to a dissenting financial creditor over the assets of the corporate debtor gives him some right over and above the other financial creditors so as to enforce the entire of the security interest and thereby bring about an inequitable scenario, by receiving excess amount, beyond the receivable liquidation value proposed for the same class of creditors."10
It was categorically specified that "It needs hardly any emphasis that if the propositions suggested on behalf of the appellant were to be accepted, the results would be that rather than insolvency resolution and maximization of the value of assets of the Corporate Debtor, the processes would lead to more liquidations, with every secured financial creditor opting to stand to dissent. Such a result would be defeating the very purposes envisaged by the Code; and cannot be countenanced."11
The Supreme Court specifically clarified the judgment passed in Jaypee Kensington case by observing that "...This court in Jaypee Kensington further made it clear that in case a valid security interest is held by a dissenting financial creditor, the entitled of such dissenting financial creditor to receive the amount could be satisfied by allowing him to enforce the security interest, to the extent of the value receivable by him and in the order of priority available to him..." The emphasis was placed on the aspect of 'entitlement', which was only to the extent of value receivable under the resolution plan, being at par with the liquidation value under Section 30 (2) (b). The Supreme Court observed that "It has never been laid down that if a dissenting financial creditor is having a security available with him, he would be entitled to enforce the entire security interest or to receive the entire value of security available with him. It is but obvious that his dealing with the security interest, if no occasion so arise, would be conditioned by the extent of value receivable by him."12
The Supreme Court was clearly mindful of the practical implications of allowing secured creditors to pursue their individual securities outside the CIRP. A contrary interpretation could open a pandora's box of claims and enforcements, defeating the scope and intent of the IBC, including the collective management by creditors.
The decision in Amit Metaliks case received some criticism particularly from sophisticated lenders who had lent against security in India. It was suggested that their exclusivity and priority should be respected, since Section 52 of the IBC contemplates enforcement of security outside the liquidation process.13
At this point it seemed clear that in a resolution plan dissenting financial creditors (1) would have to be paid the value that it was entitled to under a resolution plan in cash; or (2) could enforce its security interest only to the extent of the value that it was entitled to under the resolution plan; and (3) could not individually pursue its security interest or claim value for its security interest outside the CIRP.
- Ruchi Soya
The judgment of Amit Metaliks case continued to be followed uninterrupted until a coordinate bench of Supreme Court in DBS Bank Limited v. Ruchi Soya Industries Limited14 ("Ruchi Soya case"), took a contrasting view and referred the issue to a larger bench for framing of an appropriate question on the interpretation of Section 30 (2) (b) (ii).
In this case the Appellant, DBS Bank, had dissented from the majority vote of committee of creditors, as it approved a pari passu distribution of the resolution plan proceeds. The total admitted debt of DBS Bank was INR 242.96 crores and the liquidation value of assets over which it held exclusive charge stood at INR 217.86 crores. The payment proposed to be received by it was INR 119 crores. In fact, during the pendency of the issue before NCLAT, Section 30 (2) (b) was amended to its present form. Thus, the grievance that it was deprived of the due share given its superior value of security interest.15
The Supreme Court took the view that the minimum value payable to a dissenting secured financial creditor in terms of Section 30 (2) (b) (ii) is required to be calculated basis the value of security interest enjoyed by such secured financial creditor and not basis its voting share enjoyed by such secured financial creditor in the committee of creditors.
It observed that Section 30 (2) (b) (ii) provided an assurance to the dissenting financial creditors that they will receive as money the amount they would have received in liquidation proceedings. In relation to the Amit Metaliks case, the Supreme Court observed that the interpretation in that case seemed to be only "partially correct."16 It noted that "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... It would not be proper to read Jaypee Kensington, as laying down that the dissenting financial creditor would be entitled to the extent of amounts receivable by him in the resolution plan..."17
The Supreme Court specifically found that the decision in the Amit Metaliks case seemed to contradict the decision in the Jaypee Kensington case, as well as that in the Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others18("Essar CoC") and referred the matter to a larger bench for clarification.
While such reference remains pending, in a fairly innocuous decision in the Paridhi Finvest case, a 3 Judge Bench of the Supreme Court seems to have endorsed the position in Amit Metaliks case.
PARIDHI FINVEST:
Paridhi Finvest Private Limited ("Paridhi Finvest") had extended a loan to Value Infracon India Private Limited ("Corporate Debtor"), creating a first and exclusive mortgage over the properties of the Corporate Debtor including 30 unsold units in a building project. The units mortgaged to Paridhi Finvest were not in existence at the time of the sanction of the loan, or even subsequently.
In 2018, the Corporate Debtor was admitted into insolvency and a Resolution Professional ("RP") was appointed. Paridhi Finvest filed a claim before the RP of which an amount of INR 1,86,00,000 was admitted.
The homebuyers' association for the building project (Value Infracon Buyers Association) tied up with a developer and submitted a resolution plan, that envisaged the completion of the unfinished building project. The plan was approved by 90.45% of the lenders, and Paridhi Finvest dissented. Under the resolution plan, the amount proposed to be paid to Paridhi Finvest was INR 1,00,00,000 as against its total admitted claim of INR 1,86,00,000.
Challenging the approval of resolution plan by the NCLT, Paridhi Finvest appealed before NCLAT on the basis that as a dissenting financial creditor, it was entitled to receive sums at par with the value of its security, and not what would have been payable in case the Corporate Debtor is liquidated.
Following the ratio in the Amit Metaliks case, the NCLAT while dismissing the appeal, observed that as per Section 30 (2) of the IBC, a dissenting financial creditor is entitled to the amount that it would have received if the Corporate Debtor was liquidated. This amount is to be distributed in accordance with the order of priority provided under Section 53 (1) of the IBC.
The NCLAT found that Paridhi Finvest had a 2.38% voting share in the committee of creditors, and the amount of INR 1,00,00,000 was more than it would have been entitled to in liquidation. The Appellant's argument that it ought to have been paid at par with the value of its security (having an equitable mortgage over 30 units / flats), was not accepted.19
Paridhi Finvest approached the Supreme Court in a Civil Appeal20, and in a decision of July 2024, a 3 judge Bench of the Supreme Court dismissed the Civil Appeal finding "no reason to interfere" as "no substantial question of law is involved in the appeal".
ANALYSIS:
With the order in Paridhi Finvest case, the Supreme Court, has in effect supported and validated the view taken in Amit Metaliks case. This approach seems to be more in line with the philosophy of the IBC – creditors should not be allowed to seek individual benefits at the expense of other similarly situated creditors. Though the Supreme Court in Ruchi Soya case appeared to follow the view taken in the Jaypee Kensington case and Essar CoC judgments, it is worth noting that these judgments were rendered in a completely different context, and do not necessarily permit individual creditors pursuing their own security interest. Moreover, the Ruchi Soya case fails to recognise that even in a liquidation process, unless a lender chooses to realise the security interest as per Section 52, every asset is deemed to be part of the liquidation estate, and subject to recovery and distribution as per Section 53. No extraordinary or notional rights are vested in any individual lender.
Even as a matter of interpretation, during the CIRP, the IBC does not envisage any option for a financial creditor to exercise or enforce its security interest separately to recover its dues, whether its security is exclusive or not. Had the legislature intended to provide for a choice of relinquishment or non-relinquishment of security interest at the stage of CIRP, a provision similar to Section 52 would have been incorporated in the part of the IBC that deals with the CIRP. In its absence, there is no statutory support for any creditor getting any higher right to enforce its security interests outside a CIRP.
This is in consonance with the purpose of the CIRP as distinguished from a liquidation process – the CIRP is expected to revive the corporate debtor, while ensuring some satisfaction to its creditors, who are in charge of the revival process; while a liquidation process expects to wind up the affairs of the corporate debtor, leaving all creditors to look out for their own interests and not those of the corporate debtor.
While secured lenders would argue for a regime where the access to the value of their security is protected even if they dissent, the structure that is currently set up by IBC does not envisage any such protections. The Paridhi Finvest decision, hence, also reiterates a cautionary note for all lenders extending finance against exclusive security to Indian entities – the exclusivity of their security is likely to be ignored if the borrower enters a CIRP process and is likely to be revived by a resolution plan. Moreover, entirely unlike a non-insolvency situation, such exclusive security is not likely to grant them any greater protection or prospects of recovery over other lenders.
CONCLUSION:
While the decision of the larger Bench that will consider the reference made in the Ruchi Soya case is awaited, it is interesting to note the continuing trend of disallowing separate enforcements of security interests commenced by Amit Metaliks. This approach (which is now routinely followed by committees of creditors and resolution professionals), seems to align with the purpose of the IBC – revival of the corporate debtor while allowing some proportionate recovery to all its creditors. Alternative interpretations seeking to enhance the rights of secured creditors, while being commercially sounder, are currently unsupported by the text of the IBC; and would require an amendment or a clarification to the IBC to be effective.
Footnotes
1. See also, para 3.4.2 (pdf pg. 29) "V. The Code will respect the rights of all creditors equally
10. The law must be impartial to the type of creditor in counting their weight in the vote on the final solution in resolving insolvency"
2. Suharsh Sinha, Dilution of Secured Creditor Rights under the Indian Insolvency Regime, Oxford Business Law Blog, 22.06.2022, Accessed at https://blogs.law.ox.ac.uk/business-law-blog/blog/2022/06/dilution-secured-creditor-rights-under-indian-insolvency-regime
3. The Report of Banking Law Reforms Committee, Volume I: Rationale and Design, November 2015, para. 6.4.2. The discussion was in line with the international practices. For instance, Chapter 11 of the US Bankruptcy Code allows a creditor to not being bound by a plan unless the creditor is given a right to retain its security interest or proceeds therefrom.
4. (2022) 1 SCC 401, judgment dated 24.03.2021
5. In the resolution plan, Expressway SPV was proposed to be incorporated by the corporate debtor, upon approval of the resolution plan, and the assets and liabilities in relation to the Yamuna Expressway concession agreement were to be hived of into it. Further another, Land Bank SPV was proposed to be incorporated to take over the 1526 acres of unutilised land parcels available with the corporate debtor.
6. (2022) 1 SCC 401, para 164.2
7. (2022) 1 SCC 401, para 167
8. (2021) 19 SCC 672, judgment dated 13.05.2021
9. (2021) 19 SCC 672, para 9
10. (2021) 19 SCC 672, para 22
11. (2021) 19 SCC 672, para 23
12. (2021) 19 SCC 672, para 19
13. Mukesh Chand, Balancing Act: Navigating the Entitlement and Dissent of Secured Creditors in India's Insolvency Framework, Economic Laws Practice, 31.05.2024, Accessed at < https://elplaw.in/leadership/balancing-act-navigating-the-entitlement-and-dissent-of-secured-creditors-in-indias-insolvency-framework/>
14. (2024) 3 SCC 752, judgment dated 03.01.2024
15. (2024) 3 SCC 752, para 20
16. (2024) 3 SCC 752, para 38.2
17. (2024) 3 SCC 752, para 38.2 and 39
18. 2020 8 SCC 531
19. Similar issue was also raised before NCLAT in ICICI Bank v. BKM Industries Limited, 2023 SCC Online NCLAT 2169. NCLAT followed the judgment of Supreme Court in Amit Metaliks case and dismissed the appeal.
20. Civil Appeal, Diary No. 14065 of 2024
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