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INTRODUCTION
Under the Insolvency and Bankruptcy Code, 2016("IBC"), a resolution plan for acorporate debtor may be approved if 66% (sixty six percent) of thecreditors forming part of the committee of creditors("CoC") vote in favour of suchplan.1 So, even if a resolution plan has not beenapproved unanimously, but has been approved by the aforesaidrequisite majority, such plan is binding on all stakeholders,including the creditors who did not vote in favour of theplan.2
The 'cram down' of a resolution plan on dissentingcreditors is not a new construct and in certain jurisdictions suchas the United States of America, this practice has been prevalentfor decades.3 To balance the harshness of this right ofthe majority, the standard international practice has been to buildin several protections in the substantive law for the minoritydissenting creditors.
In light of the above, it becomes imperative to examine thedegree of protection offered to dissenting creditors under IBC andto evaluate whether the same is at par with the presentinternational standards.
LEGISLATIVE OVERVIEW
Fundamentally, 2 (two) key safeguards have been provided underIBC for dissenting financial creditors: firstly, under Section30(2)(b) of IBC, such creditors are entitled to receive amounts"which shall not be less than the amount to be paid tosuch creditors in accordance with sub-section (1) of section 53 inthe event of a liquidation of the corporate debtor" in afair and equitable manner4; and secondly, underRegulation 38(1) of the IBBI (Insolvency Resolution Process forCorporate Persons) Regulations, 2016 ("CIRPRegulations") such creditors have the right to bepaid in priority over those members of the COC who voted in favourof the resolution plan.
Further as per Section 30(4) of IBC, while determining theviability and feasibility of a resolution plan, the CoC may alsoconsider the waterfall of priority laid down in Section 53(1) ofIBC (i.e., in a liquidation scenario), along with underlying valueof the security held by the secured creditors.
Hence, the entitlement of dissenting creditors in the corporateinsolvency resolution process ("CIRP")of a corporate debtor has been linked to amounts that suchcreditors would have received, in the hypothetical situation of thecorporate debtor being liquidated. It may be pertinent to notethat, in liquidation proceedings of a corporate debtor under IBC, asecured creditor who has relinquished its security to theliquidation estate instead of realising its security outside of theliquidation estate5, gets a higher priority in thedistribution waterfall of liquidated assets.6
KEY JUDICIAL DECISIONS
In a landmark judgement of the Supreme Court of India("Supreme Court") in the case ofCommittee of Creditors of Essar Steel India Limited v. Satish KumarGupta and Ors.7 ("Essar SteelJudgement"), a 3 (three) judge bench of the SupremeCourt, while upholding the constitutional validity of theamendments made to Section 30(2) of IBC, inter-alia, observed thatthis provision was beneficial for dissentient financial creditors,as such creditors would be entitled to receive a certain minimumamount in CIRP. The Supreme Court also held that the decision toapprove a resolution plan ultimately depends on the commercialwisdom of the CoC, and that the word "may" included inSection 30(4) of IBC implied that the CoC has been granted adiscretion as to look at certain considerations while approving aresolution plan (i.e., value of security, order of priority,etc.).
Subsequently, the Supreme Court in Jaypee KensingtonBoulevard Apartments Welfare Association v. NBCC (India) LimitedOrs.8 ("Jaypee KensingtonJudgement"), while deliberating on rights ofdissentient financial creditors under IBC, relied on the EssarSteel Judgement and held that the resolution plan would be deemedto be in compliance with the provisions of Section 30(2) of IBC, ifeither actual payment of the requisite amount was made to adissenting financial creditor, or, if such creditor was permittedto recover such money by enforcing its security interest.
Thereafter, a division bench of the Supreme Court in the case ofIndia Resurgence Arc Private Limited v. Amit MetaliksLimited9 ("Amit MetaliksJudgement") considered a key issue regarding theactual quantum of the amount payable to a dissenting financialcreditor under a resolution plan. The contention raised by theappellant in this case was, that the approved resolution planoffered a payment of approximately Rs. 2,00,00,000 (Rupees twocrore) to the appellant (who was a dissenting financial creditor),without considering the valuation of the security held by theappellant, which was valued at more than Rs. 12,00,00,000 (Rupeestwelve crore). The Supreme Court, while relying on the Essar SteelJudgement and the Jaypee Kensington Judgement, upheld thediscretionary nature of the considerations provided in Section30(4) of IBC and observed that, so long as creditors of aparticular class were being accorded a fair and equitable treatmentunder the resolution plan, the commercial wisdom of the CoC inapproving or rejecting a resolution plan would reign supreme.Accordingly, an approved resolution plan which provided fordistribution amongst the secured creditors (including dissentientsecured creditors) in proportion to their respective admittedclaims in CIRP/ voting share in the CoC was considered by theSupreme Court to be fair and equitable, and the contention that adissenting secured creditor should be paid a higher amount basisthe value of security held by such creditor was dismissed.
The view taken by the Supreme Court in the Amit MetaliksJudgement and followed by the National Company Law Tribunals("NCLTs") and National Company LawAppellate Tribunal ("NCLAT") in thevarious cases thereafter, further postulates that Section 53(1) ofIBC does not contemplate any hierarchy among the lenders as per thevalue of their security interest, but instead mandates thatdistribution be made to the secured creditors in the proportion oftheir outstanding debt. 10
More recently, in the case of DBS Bank Limited, Singapore v.Ruchi Soya Industries Limited11 ("DBSJudgement"), the question before a division bench ofthe Supreme Court was as follows:
"Whether Section30(2)(b)(ii) of the Insolvency and Bankruptcy Code, 2016, asamended in 2019, entitles the dissenting financial creditor to bepaid the minimum value of its security interest?"
Interestingly, in this case the Supreme Court answered theaforesaid question in the affirmative, thereby taking adramatically divergent view from the ruling pronounced in the AmitMetaliks Judgement. The Supreme Court observed that, while the CoChas the discretion to determine the manner of distribution ofproceeds, however, Section 30(2)(b) of IBC should not beinterpreted in such a manner so as to "nullify the minimumentitlement" of a dissenting financial creditor, as thisprovision provides protection to the dissenting financial creditorfrom being coerced into accepting a lower amount under a resolutionplan vis-à-vis the amount that such creditor wouldhave received had the corporate debtor beenliquidated.12
However, in light of the contradictory views taken by theSupreme Court in the Amit Metaliks Judgement and the DBS Judgement,the matter has been referred to a larger bench.
THE INTERNATIONAL PERSPECTIVE
While we await clarity on the aforesaid issue from the SupremeCourt, it may be useful to refer to the rights of dissentingsecured creditors and the protections being offered to suchcreditors under the laws prevailing in some selectjurisdictions.
USA
Chapter 11 of the United States Bankruptcy Code("Bankruptcy Code") lays down a set ofessential conditions that have to be complied with, in order forthe court to confirm a plan of reorganization.13Paragraph 7 of § 1129(a) of the Bankruptcy Code, inter-alia,states that each member of an accepting class should have either:(i) accepted the plan of reorganization; or (ii) received orretained under the plan, "property of a value, as of theeffective date of the plan, that is not less than theamount that such holder would so receive or retain if the debtorwere liquidated under chapter 7 of this title on suchdate"14 (emphasis supplied). It may be noted,under the Bankruptcy Code, a secured creditor has a right toreceive the value of its collateral, up to the outstanding debtowed to such creditor.15
Further, the Bankruptcy Code provides that a plan ofreorganization cannot be 'crammed down' (or made binding)on a dissentient class of secured creditors, unless such plan isfair and equitable, namely: (i) such secured creditors are entitledto retain their liens and receive deferred payments aggregating tothe allowed amount of the secured claim, having a present valueequal to the value of their collateral; (ii) liens of the creditorhave been attached to the proceeds of sale of the secured property;or (iii) such creditors get the 'indubitable equivalent'(i.e. unquestionable value) of such securedclaims.16
United Kingdom
Section 901G of the Companies Act, 200617("UK Companies Act") provides that acompromise or an arrangement under Part 26A of the UK CompaniesAct, would be binding on a dissenting class: (i) if "noneof the members of the dissenting class would be any worse off thanthey would be in the event of the relevantalternative"18, i.e. liquidation, winding up,administration, etc.; and (ii) such compromise or arrangement hasbeen accepted by at least 1 (one) class of creditors or members whowould have received payments in the event of the relevantalternative.19 It may be pertinent to note that underthe Insolvency Act, 1986, read with the Insolvency (England andWales) Rules, 2016, in an administration, winding up or bankruptcy,a secured creditor has the option to: (a) rely on its securityentirely, or (b) value its security and prove for the balance debt,or (c) surrender its security and prove for the whole of thecreditor's debt (as an unsecured debt).20
Singapore
Section 70 of the Insolvency, Restructuring and Dissolution Act2018 ("Singapore IRDA") provides for thepower of the court to cram down a compromise or an arrangement on aclass of dissenting secured creditors, inter-alia, subjectto the compromise or arrangement being fair and equitable, i.e.:(i) such creditor receives an amount under such compromise orarrangement, that is not lower than the amount that such creditorwould have received "in the most likely scenario if thecompromise or arrangement does not become binding"21; and (ii) the creditor is entitled to any of theoptions stated in Section 70(4)(b)(i) of the Singapore IRDA, whichare similar to the options provided under § 1129(b)(2)(A) ofthe Bankruptcy Code.
THE OUTLOOK
From a review of the laws prevalent in the aforesaidjurisdictions, it appears that a fundamental principle that isbeing followed in bankruptcy laws globally, is that a dissentingsecured creditor has a right to receive the value of its security,up to the amount due to such creditor. Hence, the view taken by theSupreme Court in the DBS Judgement seems to be in parity with theprotection being offered to dissenting secured creditorsglobally.
It may be noted that a discussion paper was floated by theInsolvency and Bankruptcy Board of India("Board") on November 1,202322, whereunder certain amendments were proposed tothe CIRP Regulations, including amendments to Regulation 38vis-à-vis minimum entitlement of dissenting financialcreditors. However, no clarity was provided in the said discussionpaper with respect to the issue at hand. While, the IBBI(Insolvency Resolution Process for Corporate Persons) (Amendment)Regulations, 2024 were notified by the Board on February 15, 2024,the aforementioned proposed amendments to Regulation 38 withrespect to the entitlement of dissenting financial creditors werenot notified and have been held for furtherexamination.23
In financing transactions today, creditors undertake extensivedue diligence exercises and negotiations to arrive at a securitypackage, on the basis of which credit calls are taken to advanceloans/ financial facilities to borrowers. During CIRP, to deprivesuch creditors of the benefit of such collateral, would in ourview, unfairly affect their interests and not be at par with theglobally acceptable standards.
As noted above, in case of liquidation proceedings, securedcreditors have the option to enforce security outside of theliquidation estate, however no such option has been made availablein case of a CIRP. If secured creditors are being deprived of thisright, there may be impetus by secured creditors to push thecorporate debtor towards liquidation and not revival.
Therefore, in light of the coercive nature of cramdownprovisions which essentially impose the views of the majority CoCon the minority, the legitimate expectations of dissenting securedcreditors should be protected by ensuring that they receive anamount equivalent to the economic interest of their security undera resolution plan.
Footnotes
1. See section 30(4) of IBC.
2. See section 31(1) of IBC.
3. See 11 U.S.C. § 1129(b).
4. Inserted by the Insolvency and Bankruptcy Code(Amendment) Act, 2019, w.e.f. August 16, 2019.
5. See section 52 of IBC.
6. See section 53 (b) and (e) of IBC.
7. Committee of Creditors of Essar Steel IndiaLimited v. Satish Kumar Gupta, (2020) 8 SCC531.
8. Jaypee Kensington Boulevard Apartments WelfareAssociation v. NBCC (India) Ltd, (2022) 1 SCC401.
9. India Resurgence Arc Private Limited v.Amit Metaliks Limited., 2021 SCC Online SC409.
10. See: ICICI Bank Limited v. BKMIndustries Limited, NCLAT, Company Appeal no. 405 of 2023;Small Industries Development Bank of India (SIDBI) v.Vivek Raheja, NCLAT, Company Appeal no. 570 of 2023;Oriental Bank of Commerce v. Atlantic ProjectsLimited, NCLT, 2023 SCC OnLine NCLT 1379; Jet AircraftMaintenance Engineers Welfare Associate v. AashishChhawchharia, RP of Jet Airways (India) Ltd., 2022 SCC OnLineNCLAT 418 and upheld by the Supreme Court in Civil Appeal No. 407of 2023.
11. DBS Bank Limited, Singapore v. RuchiSoya Industries Limited, (2024) 1 S.C.R. 114.
12. Also see: Export-Import Bank of India andOrs. v. Eastern Silk Industries Pvt. Ltd. and Ors.,NCLT Kolkata, order dated January 31, 2024.
13. 11 U.S.C. § 1129(a).
14. 11 U.S.C. § 1129(a)(7)(A). Also see 11 U.S.C.§ 1129(a)(7)(B).
15. 11 U.S.C. § 506. Also see Lucian Arye Bebchukand Jesse M. Fried, A New Approach to Valuing Secured Claims inBankruptcy, Discussion Paper No. 321 04/2001, Harvard LawSchool, Cambridge.
16. 11 U.S.C. § 1129(b).
17. Inserted by the Corporate Insolvency and GovernanceAct, 2020.
18. UK Companies Act, Section 901G (4) defines a'relevant alternative' as "whatever the courtconsiders would be most likely to occur in relation to the companyif the compromise or arrangement were not sanctioned under section901F".
19. UK Companies Act, Section 901G.
20. Insolvency (England and Wales) Rules, 2016, Rule14.19.
21. Singapore IRDA, Section 70 (3) and70(4)(a).
22. 'Discussion paper on amendments to Insolvencyand Bankruptcy Board of India (Insolvency Resolution Process forCorporate Process) Regulations, 2016', can be accessed athttps://ibbi.gov.in/uploads/whatsnew/b70daeb0fbec8cc61d1afc52e9e9fbb8.pdf.
23. 'Gist of public comments on Discussion Paper onCIRP', can be accessed at https://ibbi.gov.in/uploads/public_comments/CIRP-Comments-on-Comments_approved-01-11-2023.pdf.
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