Introduction
In the recent judgment in the matter of DBS Bank Limited Singapore v. Ruchi Soya Industries Limited and Another[i], the Hon’ble Supreme Court (‘SC’) reignited an important discussion under the framework of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) about the manner of calculation of the minimum liquidation value (‘MLV’) payable to a secured dissenting financial creditors (‘DFC’) in terms of s. 30(2)(b)(ii) of the IBC.
Issue
Whether s. 30(2)(b)(ii) of the IBC, as amended in 2019, entitles DFCs to receive the minimum value of their security interest during insolvency resolutions.
Brief Facts
The appellant provided a financial debt of about USD 50 million (equivalent to Rs. 243 crores) to the respondent, the corporate debtor (‘CD’). The financial debt extended by the appellant to the respondent was secured by a first charge over specific immovable and fixed assets in Kandla, Gujarat, and over assets in Baran, Rajasthan; Guna, Dalauda, and Gadarwara, in Madhya Pradesh; and commercial office space at Nariman Point, Mumbai.
On 15.12.2017, a corporate insolvency resolution process (‘CIRP’) was initiated against the respondent under the IBC, whereby a resolution professional (‘RP’) was appointed, and the appellant’s claim of Rs. 242.96 crores was admitted.
On 20.03.2019, Patanjali Ayurvedic Limited submitted a resolution plan for Rs. 413.40 crores against total admitted claims of around Rs. 839.80 crores. This represented approximately 49.22% of the total admitted claims of the FCs. The appellant, a DFC, voted against the resolution plan, which was approved by 96.95% of the Committee of Creditors (‘CoC’) on 30.04.2019.
On 24.07.2019, the National Company Law Tribunal (‘NCLT’) provisionally approved the resolution plan, dismissing the appellant’s application challenging the distribution mechanism of the resolution plan proceeds.
During the appellant’s appeal to the National Company Law Appellate Tribunal (‘NCLAT’), amendments to s. 30(2)(b) were introduced by the IBC (Amendment) Act, 2019. Seeking a fair and equitable distribution, the appellant requested the CoC to reconsider the resolution plan in light of the new amendments. However, the CoC, citing ambiguity in the amendments, did not accept this request.
The NCLT approved the resolution plan on 04.09.2019. Subsequently, the appellant’s challenge to this approval was dismissed by the NCLAT. The appellant approached the SC, challenging the NCLAT’s orders. The challenge was based on the grounds of unjust enrichment, arguing that the pro rata distribution of proceeds in the resolution plan failed to consider the superior security interest held by the appellant.
Held
While taking a different view and ratio from another SC Division Bench in India Resurgence ARC Private Limited v. Amit Metaliks Limited & Anr.[ii], the SC referred this matter to a larger bench for further consideration and clarity on the interpretation of s. 30(2)(b)(ii) of the IBC.
The SC emphasized the importance of interpreting s. 30(2)(b)(ii) in conjunction with s. 53 of the IBC, rather than isolating s. 53, to preserve the legislative intent of the amendment. It clarified that a DFC is entitled to a minimum value equivalent to the monetary worth of the security interest, as outlined in s. 53(1), in the event of liquidation.
The SC clarified that the understanding of entitlement under s. 53(1)(b)(ii) of the IBC, as it applies when a secured creditor relinquishes its security interest under s. 52, does not extend to a DFC. While referring to the decision in Jaypee Kensington Boulevard Apartments Welfare Association & Ors. v. NBCC (India) Ltd. & Ors.[iii], the SC noted that a DFC is only entitled to the monetary value of the assets. Further, upon the acceptance of a resolution plan, a DFC is required to statutorily forego and relinquish its security interest.
The SC addressed the argument that s. 30(2)(b)(ii) of the IBC is unworkable due to its association with a liquidation-related concept during the CIRP period. It deemed such an interpretation contrary to legislative intent suggesting that the provision should be understood in a manner that aligns with the broader objectives and framework of the IBC. Therefore, s. 30(2)(b)(ii) of the IBC was interpreted by the SC as applicable to the distribution of proceeds or the amount entitled to the DFC under s. 53(1), in the event of the CD going into liquidation.
Regarding objections raised during the CoC meetings, the SC opined that these objections pertained to the distribution of proceeds in terms of the liquidation value and that the objections were based on the entitlement to a value not less than what the creditors would receive under s. 53(1) of the IBC. The SC rejected the argument that the appellant was not a DFC. It also addressed the alleged conflict between s. 30(4) and the amended s. 30(2)(b) of the IBC. The SC clarified that s. 30(4) relates to the approval of the resolution plan by the CoC, focusing on its feasibility and viability, and does not mandate providing each assenting party with the liquidation value. It was further held that the amendments to s. 30(2)(b) apply retrospectively to pending proceedings, ensuring that DFCs receive at least the liquidation value.
Analysis
The SC’s ruling marks a significant turn in interpreting the IBC, especially for DFCs. This decision highlights the judiciary’s approach in protecting creditors’ rights, maintaining that they should receive the value of their security interest even if they disagree with the resolution plan. It brings clarity to the application of s. 30(2)(b)(ii) of the IBC, reinforcing the principle of equitable treatment in insolvency proceedings. While setting a critical precedent for future cases, potentially influencing strategies of FCs in insolvency scenarios, this ruling clarifies that DFCs cannot enforce their security interest but are entitled to the monetary value of the assets, ensuring the viability of the resolution plan. Additionally, it signals a need for NCLTs to adapt their approach in resolving complex insolvency cases, emphasizing the importance of fair value distribution among creditors. This judgment could shape the landscape of insolvency law in India, highlighting the evolving nature of financial law and creditor rights.
End Notes:
[i] 2024 SCC OnLine SC 3
[ii] 2021 SCC OnLine SC 409
[iii] (2022) 1 SCC 401
Authored by Pratima Ajmera, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.