Introduction

The jurisprudence on the basis for pay-outs to dissenting secured financial creditors (“Secured DFCs”), under an approved resolution plan, has been in the flux for a while now. The issue remains pending before a larger bench of the Hon’ble Supreme Court, pursuant to reference made by a coordinate bench, vide an order dated January 3, 2024, in DBS v. Ruchi Soya Industries Limited and Another[1](“Ruchi Soya”). Meanwhile, a three-judge bench of the Hon’ble Supreme Court in Paridhi Finvest Private Limited v. Value Infracon Buyers Association and Another[2],  (“Paridhi Finvest”) upheld an National Company Law Appellate Tribunal, New Delhi (“NCLAT”)[3] order, which observed that Secured DFCs cannot insist that their payment under a resolution plan be calculated on the basis of the value of the security interest they hold.

Relevant Facts

In the instant case, to secure a loan availed from Paridhi Finvest Private Limited (“Appellant”), Value Infracon India Private Limited (“Corporate Debtor”) had created a first and exclusive charge over 30 unsold units in its real estate project (“Mortgage”). Upon initiation of the Corporate Insolvency Resolution Process (“CIRP”) of the Corporate Debtor, the Appellant filed a claim amounting to INR 1.86 crore. A resolution plan submitted by Value Infracon Buyers Association (backed by the Flat Buyers’ Association) (“SRA”) to the Resolution Professional (“RP”) was approved by the committee of creditors (“CoC”), with a voting share of 90.45%, as well as the National Company Law Tribunal , Delhi (“NCLT”), vide an order dated April 28, 2022 (“Impugned Order”), wherein inter alia, an amount of INR 1 crore was proposed to be paid to the Appellant (“Resolution Plan”) towards full and final resolution of its debts.

Contentions of the parties before the NCLAT

The Appellant’s challenge to the Resolution Plan inter alia premised that the proposed payment of INR 1 crore towards resolution of its debts to the Appellant was insufficient, as against the liquidation value owed to it. In its capacity as a Secured DFC, the Appellant asserted that they were liable to receive the value of the security interest held by them in the form of Mortgage, which was not taken into consideration.

The RP counsel, on the other hand, averred that since the Resolution Plan had received the requisite CoC and the NCLT consent, no grounds were made to interfere with the approval of the Resolution Plan.

The Counsel for the SRA supplemented the RP’s submissions and also argued that the Appellant being a DFC (though, secured) was only required to be paid a ‘sum not lesser than that payable in case the Corporate Debtor was liquidated’ and was not entitled for a payment as per the value of their security interest. They additionally argued that since the Mortgage was over 30 flats, which were non-existent units, the value of security interest was unascertainable.

Findings of the NCLAT and Supreme Court

NCLAT

The NCLAT rejected the arguments made by the Appellant and refused to interfere with the Impugned Order. It held that, under Section 30(2) of the Code, a Secured DFC is entitled to receive no less than its due amount in the event of the Corporate Debtor’s liquidation. In this particular case, the Resolution Plan proposes to pay INR 1 crore to the Appellant, who holds a 2.38% voting share in the Committee of Creditors (CoC). This amount exceeds the INR 99,19,425 that would be payable to them, according to the order of priority outlined in Section 53(1) of the Code.

The NCLAT further relied on the Supreme Court’s judgement in India Resurgence ARC Private Limited v. Amit Metaliks Limited[4] (“Amit Metaliks”),and held that a Secured DFC cannot insist on payment of amount as per the security interest it holds, when there is resolution of the Corporate Debtor through a resolution plan.

The NCLAT also placed reliance on its judgement in ICICI Bank Limited v. BKM Industries Limited[5], wherein it had observed that the CoC’s decision to distribute proceeds based on the proportion of admitted claims was in accordance with the provisions of the Code and reiterated that a Secured DFC’s entitlement is limited to receiving the ‘minimum amount’ stipulated in Section 53(1) of the Code, and such distribution cannot be on the basis of its security interest.

Supreme Court

A three-judge bench of the Supreme Court[6], without getting into the conflicting positions taken in the Amit Metalliks and Ruchi Soya cases or the reference made to the larger bench in the latter, summarily dismissed the appeal filed against the Impugned Order by holding thatthe said appeal “does not involve any substantial questions of law” and it does not require any interference.

This prompts the question – will the larger bench resound this judgement in the Ruchi Soya reference and conclusively seal the issue on pay-outs to Secured DFCs. To understand the intricacies of the issue, one must trace the legislative intent and the judicial interpretation of the relevant provisions (namely Sections 30(2)(b)(ii) and 30(4) of the Code), along with the global position.

Tracing the legislative intent and judicial interpretation

The need for minimum payment to DFCs was first recommended in the Report of the Insolvency Law Committee (March 2018 )[7]. Consequently, an amendment was carried out in Section 30 (2) (b) of the Code [8], providing for payments to be made to DFCs as per the liquidation value allocable to them (basis the priority waterfall set out in Section 53 (1) of the Code), in priority to the assenting financial creditors (“S. 30(2)(b) Amendment”). Prior to this, such benefit was only available to operational creditors (“OCs”). Additionally: (i) an explanation was introduced[9] to state that distribution under Section 30(2)(b) shall be ‘fair and equitable’ to DFCs and OCs; and (ii) Section 30(4) of the Code was amended to equip the CoC with the discretion to consider inter alia the priority laid out in Section 53(1) and the value of security interest, while deciding the manner of distribution proposed under a resolution plan (“Section 30(4) Amendment”).  

The Hon’ble Supreme Court in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta[10] (“Essar Steel”), while upholding the validity of Section 30(2)(b) Amendment, inter alia observed that it was in fact a beneficial provision in favour of DFCs (including secured) as, post such amendment, DFCs will be paid a minimum amount that was not payable earlier, thereby protecting them from a blanket cramdown. However, the Supreme Court clarified that the reference to Section 53(1) in this amendment is solely to establish a ‘certain minimum figure’ for payments to DFCs and OCs. It emphasised that as per Section 30(4), the CoC has the discretion to determine the payment amount for various classes of creditors and to consider factors like the value of security interest. Such discretion would not be subject to judicial review unless similarly situated creditors are not accorded a ‘fair and equitable treatment’[11].

Thereafter, the Hon’ble Supreme Court in Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC (India) Ltd[12](“Jaypee Kensington”) held that for compliance with Section 30(2)(b), ‘payment’ of liquidation value to Secured DFCs would mean handing over the quantum of money to them or allowing the Secured DFCs to recover such money by enforcing the security interest that they hold, ‘as per their entitlement’/‘to the extent of value receivable by such DFC’.

However, the question on whether ‘equitable treatment’ or ‘entitlement’ for Secured DFCs would necessarily include the value of the security interest they hold, to decide their payout under a resolution plan, remained.

A coordinate bench of the Apex Court in Amit Metaliks case, referring to (and relying on) the Essar Steel and Jaypee Kensington judgments, addressed this question by holding that: (i) in light of Section 30(4) Amendment, it is clear that the CoC has the discretion to decide distribution among similarly situated creditors, (ii) to qualify as ‘equitable treatment’, the proposal for payment to a Secured DFC has to be at par with the proportion/percentage offered to secured AFCs; and (iii) it is not the legislature’s intent to provide Secured DFCs the entire value of the security interest that they hold as part of the payouts under a resolution plan as this would result in an inequitable scenario where secured creditors would be incentivised to vote for liquidation rather than resolution, thereby defeating the entire objective of the Code.

Taking a contrary position, another coordinate bench of the Apex Court in Ruchi Soya[13] observed that the language in Section 30(2)(b)(ii) (by referring to Section 53(1)) protects the position of a Secured DFC by assuring that they are at least paid an amount equivalent to the value of their security interest[14]. Highlighting the importance of secured credit for the financial ecosystem, the Court held that while it’s a given that an unwilling secured creditor must forgo its security in a resolution scenario, however, such creditor is entitled to the value of its security to ensure protection of minority autonomy[15].  Given the contrary interpretation taken by another coordinate bench in Amit Metalliks, Hon’ble Justice Sanjeev Khanna deemed it appropriate that the question be referred to a larger bench of the Supreme Court for further examination, acknowledging the crucial ramifications it may so bear. The decision of the larger bench is pending as of date.

Global Position

To address this impasse, reference to global positions becomes relevant. The UNCITRAL Legislative Guide on Insolvency Law, which forms the basis/guide for various jurisdictions to enact their respective insolvency legislations, affirms that if a DFC is secured, they should receive payment equivalent to the value of their security interest.[16] This principle ensures that creditor confidence is maintained and minority creditors are protected from being pressurised into accepting resolution terms that they consider unfavourable[17].

Turning to key jurisdictions, the United States Bankruptcy Code does not allow a plan of reorganisation to ‘cram down’ dissenting secured creditors, unless due standards of fairness and equity are maintained and to ensure the same, Chapter XI of the US Bankruptcy Code stipulates that a secured creditor can only be bound to a plan if such creditor is given the right to retain its security interest or proceeds from its security interest. Section 901G of the Companies Act, 2006, in the United Kingdom[18] and Section 70(b)(1)(B) of the Insolvency, Restructuring and Dissolution Act, 2018, in Singapore[19], appear to be setting a fundamental premise that Secured DFCs should have the right to receive the value of its security as payment towards the amount due to them.

Therefore, the global position appears to be in favour of protecting the security interest value for payouts to Secured DFCs in an insolvency resolution scenario.  

Conclusion

While the observations of the coordinate Bench in Ruchi Soya appears to be echoing the global position, the Full Bench order upholding the NCLAT Order in Paridhi Invest (which relies on Amit Metaliks) makes us wonder if this position is a reflection of the view that may be taken by the larger bench  in Ruchi Soya.

Insolvency proceeding is a collective scheme process where interests of all stakeholders are taken into account, and not the interests of individual stakeholders. However, this principle cannot be used to defeat or take away the legal rights available to a stakeholder under general law, and especially that of a secured creditor whose position is secured and sacrosanct under the general laws of every jurisdiction. While the inequitable scenario highlighted in Amit Metalliks (a Secured DFC getting more than a secured AFC) has some weightage, it would also be inequitable if a CoC, comprising of unsecured financial creditors being in requisite majority, exercises its discretion to cramdown Secured DFCs without considering their security interest value. Also, in majority of the insolvency cases, the enterprise value is negligible by the time a resolution plan is getting approved, and if only this value is considered for determining the liquidation value allocable to a Secured DFC, then it will almost always affect their payout in a resolution scenario.

We, therefore, will have to wait for the decision of the larger bench in Ruchi Soya to see if an assured secured position will be at the mercy of the commercial wisdom of CoC, or will it be protected, in line with the globally accepted position.                

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[1] [2024] 1 S.C.R. 114.

[2] Order dated 10 July 2024 in Civil Appeal Diary Number 14065 of 2024.

[3] Order dated January 9, 2024 of the Hon’ble NCLAT in Company Appeal (AT) (Ins) No. 654 of 2022.

[4] 2021 SCC OnLine SC 409. The Supreme Court has held 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 give 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’. Refer to Para 15

[5] Order dated November 06, 2023 in Company Appeal (AT) (Ins) No. 405 of 2023

[6] Comprising of Hon’ble Chief Justice DY Chandrachud, Justice JB Pardiwala, and Justice Manoj Mishra, vide order dated July 10, 2024.

[7] Paragraph 18.4, Report of the Insolvency Law Committee, p. 57-8 (March 2018 ), https://ibbi.gov.in/ILRReport2603_03042018.pdf. The report stated that the most prudent way to resolve the entitlement owed to DFCs may perhaps not be attained “by tinkering with what minimum must be guaranteed to such creditors statutorily, but by sustained efforts of regulatory bodies at improving the quality of resolution plans overall  .”

[8] The Insolvency and Bankruptcy Code (Amendment) Act, 2019, s. 6.

[9] Explanation 1 to Section 30(2)(b) of the Code.

[10] (2020) 8 SCC 531.

[11] Explanation 1 to the Section 30(2)(b) as introduced vide the said Amendment.

[12] (2021) 5 SCC 624.

[13] Hon’ble Justices Sanjiv Khanna and SVN Bhatti.

[14] Para nos. 33-36.

[15] Para 26

[16] Para IV.A.29, UNCITRAL Legislative Guide on Insolvency Law, p. 232, Legislative Guide on Insolvency Guide (un.org) Also, referred to in Ruchi Soya, see para 32.

[17] World Bank’s 2015 Report on the Principles for Effective Insolvency and Creditor/Debtor Regimes, available at https://documents1.worldbank.org/curated/en/391341619072648570/pdf/Principles-for-Effective-Insolvency-and-Creditor-and-Debtor-Regimes.pdf

[18] “…(2) If conditions A and B are met, the fact that the dissenting class has not agreed the compromise or arrangement does not prevent the court from sanctioning it under section 901F.

(3) Condition A is that the court is satisfied that, if the compromise or arrangement were to be sanctioned under section 901F, none of the members of the dissenting class would be any worse off than they would be in the event of the relevant alternative (see subsection (4)).

(4) For the purposes of this section “the relevant alternative” is whatever the court considers would be most likely to occur in relation to the company if the compromise or arrangement were not sanctioned under section 901F…”

[19] “For the purposes of subsection (3)(c), a compromise or an arrangement is not fair and equitable to a dissenting class unless —

(a)           no creditor in the dissenting class receives, under the terms of the compromise or arrangement, an amount that is lower than what the creditor is estimated by the Court to receive in the most likely scenario if the compromise or arrangement does not become binding on the company and all classes of creditors meant to be bound by the compromise or arrangement; and

(b)           either of the following applies:

(i)            where the creditors in the dissenting class are secured creditors, the terms of the compromise or arrangement

…

— (B)      must provide that where the security held by any creditor in the dissenting class to secure the creditor’s claim is to be realised by the company free of encumbrances, the creditor has a charge over the proceeds of the realisation to satisfy the creditor’s claim that is secured by that security”.

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