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Adding an ‘E’ to the (E)-Adjudication Process under Companies Act

Introduction

“Compliances” are inevitable certainties for companies. The provisions of the Companies Act, 2013 (“Act”) and various rules formulated under it prescribe the various compliances and the way companies[1] must fulfil them. The Act provides for 4 (four) meetings of the board of directors to be held in a year[2]and also prescribes a penalty[3] of INR 25,000 on “every officer” of a company responsible for giving notice about such meetings but failing to do so. Similarly, the Act provides for how the financial statements of a company are to be prepared and approved inter alia by the board of directors[4] and provides for the imposition of a penalty of three lakh rupees on the company for default in compliance with the requirements prescribed.[5]

This year has also seen various instances of imposition of penalties on companies for their failure to notify “significant beneficial owners”.[6] Besides penalties for failure to abide by regulatory compliances, the scheme of the Act also provides for penalties in matters of investigation, such aspenalties on a director and/or officer of the company for not cooperating with the investigation initiated by the Registrar of Companies[7] (“RoC”) and/or by the Serious Fraud Investigation Office[8]. The RoC of Gujarat, Dadra, and Nagar Haveli, in the matter of Hatian Huayuan, vide order dated January 31, 2023,[9] imposed a penalty of INR 50,000 on the statutory auditor of the company under Section 450[10] of the Act for failing to provide the documents requested, which was a violation of Section 207(3)[11] of the Act.

The Act provides for myriad compliances and penalties, but at first blush it may appear that it does not expressly set out the adjudication ofthese penalties. However, that is not the case. Section 454 of the Act confers powers on the Central Government to adjudicate penalties under the Act, as may be prescribed. The procedure for adjudication of penalties is set out in the Companies (Adjudication of Penalties) Rules, 2014 (“CAPR”), enacted under the power conferred under Section 454 of the Act.

This article considers the general background of the CAPR – relevant authorities, brief procedure, etc. – and analyses the recent amendments to the CAPR, which, among other things, have digitised the adjudicatory process.

Adjudication under the Companies Act

The right to a fair hearing and a chance to present one’s case are inherent to any adjudicatory process. Proceedings under the CAPR are no different. This is reflected from a conjoint reading of Section 454 of the Act and the CAPR. The CAPR provides for a two-stage adjudicatory process. The authority of the first instance is the jurisdictional RoC, also referred to as the Adjudicating Officer (“AO”). The jurisdictional Regional Director (“RD”) is the appellate authority.

Section 454 of the Act specifies that a reasonable opportunity for a hearing be provided before the imposition of a penalty. The AO is conferred with the power to summon and enforce attendance of documents and direct production of documents/evidence.[12] Thus, the proceedings under the CAPR are quasi-judicial in nature. While the strict rigours of procedure and evidence may not apply, the authorities under the CAPR must necessarily adopt a judicious approach to ensure compliance with the principles of natural justice.  

Section 454 of the Act further allows an AO to impose penalties on a company, an officer in default of a company, or any other person for non-compliance or default under the Act; and direct the rectification of such default. Show Cause Notices (“SCN”) for non-compliance or default may be issued for matters pertaining to significant beneficial ownership,[13] maintaining a registered office,[14] filing of financial statements,[15] compliance with CSR provisions,[16] appointment of directors,[17] constitution of committees,[18] etc., and the AO may levy subsequent penalties following the procedure laid down in the CAPR. The CAPR provides for the AO to issue a notice, giving the notice a period of 15 to 30 days for showing cause for why penalty should not be imposed,[19] consider the reply received, allow for a personal hearing at his discretion,[20] and then pass an order after giving the party the opportunity of being heard.[21]

Further, even though Section 454 of the Act does not specifically provide for it, companies or officers in default may also apply to the AO suo moto if they become aware of a non-compliance (which does not have a direct consequential fine or penalty provision under the Act or has penalties (as opposed to fines or imprisonment) prescribed) and wish to rectify it. Such suo moto applications may be for matters such as delay in filing certain resolutions and agreements,[22] delay in holding board meetings or not holding sufficient board meetings in a year,[23] not maintaining the minimum number of directors,[24] etc. This too has been governed by the CAPR procedure, as applicable. However, with the amendment to the CAPR this year, the entire process for adjudication will now shift online.

Impact on Pending Proceedings

On August 5, 2024, the CAPR was amended to include a new Rule 3A,[25] which provided for conducting all proceedings before the AO and the RD electronically through the e-adjudication platform developed by the Central Government from September 16, 2024 (“Effective Date”). This includes processes such as issuing notices, filing replies and documents, presenting evidence, holding hearings, attending witnesses, passing orders, and paying penalties. However, Rule 3A, as it stood, did not clearly state what would happen to proceedings that were already initiated, in that it did not specify whether existing proceedings would continue as is or migrate to the e-adjudication platform. Hence, some confusion has arisen among the AO/RoCs and the companies regarding the procedure to be followed for existing cases.

The addition of the proviso to Rule 3A on October 9, 2024,[26] clarified that the proceedings pending before the AO and RD, as on the Effective Date, would continue as per the previous procedure. Hence, the e-adjudication requirement would apply only to proceedings initiated after the Effective Date. However, some uncertainty persists regarding the continuity of proceedings where an order is passed after the Effective Date under the previous procedure. In such a scenario, if the company chooses to appeal, would the appeal be according to the prior procedure or be adjudicated online? If adjudicated online, how would the documents and data be transferred, and could the initial technical glitches impact the strict timelines provided? While the previous CAPR also allowed some filings to be made online, the amended CAPR represents an overall change in terms of moving the entire process online.

The shift to an e-adjudication model for disputes under the Act is laudable and serves to improve the ease of doing business in theory, but the Ministry of Corporate Affairs (“MCA”) must do more to prepare companies and their officers to navigate the new system in place. The MCA has released FAQs[27] on the new e-adjudication module, highlighting in detail the process and powers of the authorities concerned. For instance, the FAQs describe how a company may revert to a SCN, attend a faceless hearing, submit documents online, and allow an authorised representative to attend. However, guidance is absent on how to navigate technical difficulties and procedural grey areas. These could have been anticipated, given that other regulators who had previously adopted faceless/e-adjudication mechanisms had encountered these issues. For instance, faceless assessment initiated by the income tax department faced a number of difficulties initially, from minor technical glitches, such as the file size allowed as an attachment, to major legal issues, the potential violation of the principles of natural justice by foregoing parties’ right to be heard due to lags in communication and crunched timelines not giving parties the opportunity to effectively present their case.[28] The MCA has definitely addressed the most common issues that could be faced, and it is likely that the other issues, too, would be resolved soon. Nevertheless, a formal clarification regarding the status of appeals pending under the prior mechanism would go a long way in assuring companies that everything is not left solely to case-by-case discretion.

The Effects of Digitisation

The RoCs handle a large volume of cases, passing roughly 600 orders until June this year.[29] Of these, at least 24 cases dealt with lapses in SBO compliance in the second quarter,[30] involving several multinational companies and global investment funds. These numbers are not inconsequential. The entire adjudicatory process of issuing a SCN, processing the reply, holding a hearing, and then drafting an order is lengthy and expensive for both the AOs and the companies. Shifting the adjudication process online through the amendments to the CAPR would not only potentially increase the speed of adjudication but also reduce logistical difficulties and streamline the process.

Further, companies have to regularly make decisions on handling and rectifying non-compliances as and when they occur. Depending on the type and severity of the default, a company or its officers may just have to deposit a late fee, opt for suo moto adjudication of a penalty, or opt for compounding in cases involving fines or imprisonment. Given the increasing number of RoC notices being issued to multinational companies, the ease of these processes is also a factor in the decision to rectify the defaults. Online adjudication would open the doors for companies being represented by more informed professionals and may even improve the subject treatment of these adjudication orders.

However, it is necessary to ensure that all companies have the requisite infrastructure in place to ensure these digital systems are accessible and viable. For instance, some small companies, charitable companies, or producer companies might not be able to fulfil the strict documentation requirements since their records might not be fully digitised, or be available in the correct formats. Additionally, they might not have the technical capabilities or the know-how to operate the online portal under the amended rules. It is necessary to provide some time for these companies to transition to the new procedure and not penalise them for failing to meet the requirements. Instead, there should be some training sessions for companies and their officers, or even an extension of the timeline, such as the one provided for the dematerialisation of shares, to ensure compliance and adherence with the new procedures.

Concluding Remarks

The move towards digitisation, nevertheless, has some apparent benefits for efficiency and convenience. In its ideal form, it eliminates the need to document and store bundles of letters, notices, and receipts and replaces it with a comprehensive portal where all details are readily available. Further, online hearings would save both time and resources for a company and ensure that its authorised representatives can attend hearings from anywhere, without wasting their valuable hours on travelling.  An automated system would also allow for easier authentication of documents and facts, leading to faster resolution of disputes besides lowering the administrative load for all stakeholders. Such a measure is beneficial not only from an ease-of-doing-business standpoint but also from a rule of law perspective since a digital system of adjudication would promote transparency and accountability. This vision may sound utopian, but it is very achievable if all initial hurdles can be smoothed out eventually. There may be some initial hurdles while companies familiarise themselves with the platform and the authorities adjust to the new way of doing things. However, once all stakeholders adapt to the new realities, the e-adjudication process envisaged by the recent CAPR amendment could function seamlessly in a truly “Digital India”.


[1] The Companies Act, 2013, Section 2(20)- a company incorporated under this Act or any previous company law.

[2] The Companies Act, 2013, Section 173(1)

[3] The Companies Act, 2013, Section 173(4)

[4] The Companies Act, 2013, Section 134 (1) to (7)

[5] The Companies Act, 2013, Section 134(8)

[6] The Companies Act, 2013, Section 90

[7] The Companies Act, 2013, Section 207(4)

[8] The Companies Act, 2013, Section 217(6)

[9] Adjudication Order in the Matter of M/s. Price Waterhouse Chartered Accountants LLP, Statutory Auditors of M/S. Haitian Huayuan Machinery (India) Private Limited, https://www.mca.gov.in/bin/dms/getdocument?mds=GPKQUn8LlxO1fV5TwzCRiA%253D%253D&type=open

[10] Section 450 of the Act prescribes a punishment where no specific penalty or punishment is provided under the Act, of INR 10,000 with an addition of INR 1,000 per day till the contravention continues, subject to a cap of INR 2,00,000 for a company and INR 50,000 for an officer in default.

[11] Section 207(3) of the Act empowers the RoC or inspector making an inspection with all the powers of a civil court to call for production of documents, summoning and examining persons, and inspecting documents of the company at any place.

[12] Companies (Adjudication of Penalties) Rules, 2014, Rule 3(10.

[13] The Companies Act, 2013, Section 90.

[14] The Companies Act, 2013, Section 12.

[15] The Companies Act, 2013, Section 137.

[16] The Companies Act, 2013, Section 135.

[17] The Companies Act, 2013, Sections 149 and 172.

[18] The Companies Act, 2013, Section 178.

[19] Companies (Adjudication of Penalties) Rules, 2014, Rule 3(2).

[20] Companies (Adjudication of Penalties) Rules, 2014, Rule 3(5).

[21] Companies (Adjudication of Penalties) Rules, 2014, Rule 3(6).

[22] The Companies Act, 2013, Section 117.

[23] The Companies Act, 2013, Section 173.

[24] The Companies Act, 2013, Section 149 read with Section 172.

[25] Companies (Adjudication of Penalties) Amendment Rules, 2024 dated August 05, 2024 available at 256076.pdf (egazette.gov.in)

[26] Companies (Adjudication of Penalties) Second Amendment Rules, 2024, dated October 09, 2024 available at 257790.pdf (egazette.gov.in)

[27] Frequently Asked Questions about the E-Adjudication Module: e-Adjudication-module-FAQs.pdf (mca.gov.in).

[28] Timsy Jaipuria, ‘Faceless tax assessment creating chaos and legal log jam, alleges industry’ CNBC TV 18 (November 17, 2023) available at Faceless tax assessment creating chaos and legal log jam, alleges industry – CNBC TV18; Deepshikha Sikarwar, ‘Makeover likely to give faceless I-T assessment a friendlier face’ The Economic Times (June 26, 2024) available at Makeover likely to give faceless I-T assessment a friendlier face – The Economic Times (indiatimes.com).

[29] Archana Rao, ‘MCA Steps Up Enforcement Against Non-Compliant Companies in India’ India Briefing (July 11, 2024) available at MCA Tightens Grip on Corporate Non-Compliance in India (india-briefing.com)

[30] Gireesh Chandra Prasad, ‘Four businesses penalized in last 2 weeks for lapses in reporting beneficial ownership’ Mint (July 29, 2024) available at Four businesses penalized in last 2 weeks for lapses in reporting beneficial ownership | Company Business News (livemint.com)

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Introduction:

The rapid development and deployment of Artificial Intelligence (“AI”) and Machine Learning (“ML”) tools by market participants over the course of the past year prompted the Securities and Exchange Board of India (“SEBI”) to issue, on November 13, 2024, a consultation paper on “Proposed amendments with respect to assigning responsibility for the use of Artificial Intelligence Tools by Market Infrastructure Institutions, Registered Intermediaries and other persons regulated by SEBI” (“Draft Amendments”), seeking public suggestions on a series of amendments to the extant regulations.

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Semiconductor Partnerships: Key Considerations

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CCPA schools coaching centres on misleading advertisements

The Central Consumer Protection Authority (“CCPA”) has issued Guidelines for Prevention of Misleading Advertisement in Coaching Sector, 2024 (“Guidelines”)[1] on November 13, 2024. The Guidelines are introduced to address the issue of misleading advertisements, including deliberate concealment of important information and false guarantees, i.e., practices plaguing the coaching industry.

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Karnataka High Court rules cab-aggregator drivers are employees under POSH Act: Broader implications for gig workers in India

In a significant legal development,the Karnataka High Court (“HC”) inMs. X v. ANI Technologies Private Limited (“Respondent“) and Others[1] inter alia held that the driver-subscribers of the Respondent were its ‘employees’ for the purposes of the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 (“POSH Act”), and hence, the Respondent was in violation of the POSH Act for not taking any action against a driver-subscriber despite several attempts of the aggrieved customer to seek redressal (“Petitioner”). The writ petition was filed by the Petitioner, pursuant to inaction on the part of the Respondent and the internal committee (“IC”) constituted by it under the POSH Act, to consider the Petitioner’s request to inquire into her complaint of sexual harassment on the grounds that the IC lacked jurisdiction to do so as the said accused driver was not an ‘employee’ of the Respondent, but an independent contractor.

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A Fine Balance: A Perspective on recent RoC Orders

Introduction

India is in its “vocal for local” and “ease of doing business” (“EoDB”) era. Yet the slew of show cause notices and penalty orders the jurisdictional registrar of companies (“RoC”) has issued against Indian companies and its directors in the recent past[1] for alleged non-compliance of significant beneficial ownership (“SBO”) disclosures,[2] corporate social responsibility (“CSR”) contributions,[3] etc. under the Companies Act, 2013 (“Companies Act”), reflect the need for a well-balanced system.

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Jet, Set and Grounded – Supreme Court orders liquidation of Jet Airways

Introduction

The saga of the insolvency resolution of Jet Airways India Limited (“Jet”), once India’s leading airline, has disappointingly culminated, after several twists and turns, in a liquidation order by the Hon’ble Supreme Court of India, in its judgment dated November 7, 2024[1] (“SC Judgment”). The SC came to this conclusion upon having found that the Jalan-Kalrock Consortium[2], the successful resolution applicant (“SRA”), had failed to implement the resolution plan as was approved by the Adjudicating Authority in 2021 (“Plan”).

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The Paradox of Security Interest for Dissenting Secured Creditors: Has the Paridhi Finvest Judgement settled the issue?

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.                


[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”.