[Saksham Chaturvedi is a 5th year law student at National Law University, Odisha]
A division bench of the Supreme Court in DBS Bank v. Ruchi Soya has referred an issue concerning the interpretation of the amended section 30(2)(b) of the Insolvency and Bankruptcy Code, 2016 (IBC) to a larger bench. The question before the bench in DBS Bank was whether, as per the amended section 30(2)(b)(ii) of the IBC, a dissenting financial creditor was entitled to a minimum value of its security interest.
Section 30(2) of the IBC provides mandatory compliances in a resolution plan that are to be examined by the Resolution Professional (RP) before submitting the plan for approval by the Committee of Creditors (CoC). Before forwarding the resolution plan to the CoC, section 30(2)(b)(ii) of the IBC requires the RP to ensure two important aspects: first, that the resolution plan provides for payment towards operational creditors which is not less than the amount that would have been paid to such creditors as per the waterfall mechanism under section 53 and second, that the payment to a dissenting financial creditor is not less than the amount to be paid in case of liquidation of the corporate debtor.
Departing from an interpretation of Section 30(2)(b) proffered by another two-judge bench in India Resurgence ARC Private Limited v. Amit Metaliks Limited, the bench in DBS Bank posited that a dissenting financial creditor is entitled to, in the very least, the value of their security interest. Thus, finding itself at variance with another bench of equal coram, the Court deemed it appropriate to refer the matter to a larger bench.
This article analyses the judgment of DBS Bank and predicts that answering this reference would considerably involve more than the mere literal interpretation of section 30(2)(b).
Section 30 of the IBC: Rights of the Unrepresented Stakeholders
Section 21(2) of the IBC provides that the CoC shall comprise all financial creditors of the corporate debtor. As per section 30(4) of the IBC, the CoC is empowered to vote and approve a resolution plan. Thus, operational creditors are not part of the insolvency resolution process and are, as such, the unrepresented stakeholders in the process.
To ensure that the rights and claims of operational creditors are not squandered away, section 30 of the IBC ensures that claims of operational creditors are accommodated. Section 30(2) requires a resolution plan to provide a payment mechanism ensuring that operational creditors are paid an amount that is not less than the amount they would have received in the event of liquidation. This is why the RP under section 30(3) and the adjudicating authority under section 31(1) are required to ensure that all resolution plans are compliant with section 30(2).
Section 30(2)(b) of the IBC was amended vide the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018. The pre-amendment position under section 30(2)(b) required the RP to ensure that each resolution plan provides for payment towards operational creditors that is not less than the amount they would otherwise receive in the event of a liquidation of the corporate debtor under section 53. However, post-amendment, section 30(2)(b) now requires the RP to also ensure a dissenting financial creditor is paid an amount that is not less than the amount they would receive in the event of a liquidation under section 53.
Purposively, the amendment ensured that apart from operational creditors, even dissenting financial creditors – those who choose to vote against the resolution plan – are not left in the lurch.
DBS Bank v. Amit Metaliks: Striking a Discordant Note
In DBS Bank, the financial creditor of the respondent corporate debtor voted against the resolution plan. This is because, under the resolution plan, they stood to receive Rs. 119 crores as against the liquidation value of the security interest of Rs. 217 crores for an admitted claim of Rs. 242 crores.
The Court contemplated that the 2019 Amendment precisely forfends a dissenting financial creditor from settling for an amount lower than that payable during the liquidation of the corporate debtor. While a dissenting financial creditor cannot suggest that a higher amount be paid to them under the resolution plan, the right of such a creditor to receive payment equivalent to the value of the security interest (or liquidation value) exists. While maximising the value of assets and preventing liquidation are important, the rights of operational creditors and dissenting financial creditors have to be protected, as stipulated.
A three-judge bench of the Supreme Court in Essar Steel India Ltd. v. Satish Kumar Gupta ruled that as per the amended section 30(2)(b), a dissenting financial creditor would be entitled to a minimum liquidation value. Interpreting the scope of ‘minimum liquidation value’ in Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC (India) Ltd, the Supreme Court clarified that a creditor who dissents to the resolution plan has to be paid in monetary terms as per section 30. However, if a secured financial creditor takes such dissent, then they may be allowed to enforce their security interest to the extent of their claim.
The scope of the amended section 30(2) concerning the right of dissenting secured financial creditors to claim the value of their security interest was considered in Amit Metaliks. In Amit Metaliks, the appellant, a secured dissenting financial creditor, held security valued at Rs. 12 crores but was offered only Rs. 2 crores against his admitted claim of over Rs. 13.38 crores. When the resolution plan was challenged for being opposed to section 30(2), the Court ruled that the resolution plan could not be challenged by the dissenting financial creditor on the ground that he was entitled to a higher amount based on the value of the security interest.
Therefore, while DBS Bank posits that section 30(2)(b) enables a secured creditor to seek payment of the value of their security interest, Amit Metaliks says that the same is not a ground to challenge a resolution plan.
In its reference, the Supreme Court is now poised to clarify the judgments in Essar Steel and Jaypee Kensington, as well as provide a sound interpretation of the amended section 30(2)(b). While examining the issue, the Supreme Court would either have to afford precedence to the rights of the minority in the CoC or balance the interests of all stakeholders in the liquidation proceedings and treat all secured creditors alike.
Rights v. Prudence: Questions for the Reference
If the position contemplated by the Supreme Court in DBS Bank is accepted, it would invariably lead to an outcome where secured financial creditors would only approve a resolution plan that guarantees full recovery of their security interest.
If a majority of the financial creditors are secured creditors and choose to dissent to a resolution plan, it would lead to more liquidations of corporate debtors. This is problematic and unsettling for two principal reasons. First, this defeats the primary purpose of the IBC, which inter alia was to ensure the revival of sick companies and maximisation of credit from assets. If secured financial creditors can opt to enforce their security interest and obtain a guaranteed value of their security interest, it would undermine the moratorium issued under the IBC. Such a scheme would also obviate a true estimation of the corporate debtor’s assets, as the same would be indeterminable till the final stage, in case a secured financial creditor dissents and chooses to enforce their security interest – bringing down the value of the liquidation estate.
Second, this would unnecessarily lengthen the resolution process, add to the resolution costs, and lead to more liquidations where financial creditors are secured creditors. The only scenario in which secured creditors would be incentivized to vote for a resolution plan is when the haircut is minimal, which, as the record suggests, is a rarity.
Section 30(2)(b)(ii) of the IBC stipulates that a dissenting financial creditor should not receive an amount lower than the liquidation value. This should simply be interpreted as the amount that a secured financial creditor would receive if the corporate debtor were to be liquidated. In this context, interpreting Section 30(2)(b) to mean that a dissenting financial creditor is entitled to the value of their security interest may be imprudent and contrary to the spirit of the IBC.
Conclusion
The Court’s approach in referring the issue before it to a larger bench is prudent. The ruling does not disturb the existing legal position while ensuring that the issue is settled by a bench of larger coram strength. There have been examples in the past of Courts taking varied approaches on matters of IBC and causing uncertainty. The 2-judge bench in Raman Ispat contradicted the Rainbow Papers’ judgment on the position of government as a secured creditor, although both benches were of equal coram strength. As suggested in Sanjay Kumar Agarwal, this approach was wrong – the Court in Raman Ispat, after finding itself at variance with the position in Rainbow Papers, shouldn’t have returned a contrary finding but referred the matter to a larger bench.
Adopting the correct approach, the Court in DBS Bank has recorded its dissension with the observations rendered in Amit Metaliks and referred the matter to a larger bench. The larger bench would, therefore, have the benefit of perusing the different opinions before reaching a conclusion. Until the reference made in DBS Bank is answered, the judgment in Amit Metaliks would hold the field. However, even while the reference is pending, any Supreme Court bench comprising three or more judges can affirm the apprehensions raised in DBS Bank and rule that the judgment in Amit Metaliks was per incuriam to Essar Steel and Jaypee Kensington.
– Saksham Chaturvedi