Analysis on Dissenting Financial Creditors

Introduction

In a significant judgment dated 03 January 2024, the Supreme Court of India considered the rights of dissenting financial creditors under the Insolvency and Bankruptcy Code, 2016 (IBC) in the case of DBS Bank Ltd Singapore v. Ruchi Soya Industries Ltd. The central question was whether a dissenting financial creditor is entitled to receive at least the liquidation value of its security interest under Section 30(2)(b)(ii) of the IBC. Importantly, the Court referred the issue to a larger bench, signaling a potential shift or clarification in IBC jurisprudence.

Factual Background

• DBS Bank Ltd Singapore had extended financial assistance of USD 50 million to Ruchi Soya Industries Ltd., secured by an exclusive first charge on various immovable and fixed assets.
  
• Following the initiation of CIRP in 2017, DBS’s claim of INR 242.96 crore was admitted by the Resolution Professional.
  
• A resolution plan submitted by Patanjali Ayurvedic Ltd. offered INR 4,134 crore, covering only 49.22% of total admitted claims.
  
• Despite objections raised by DBS regarding its exclusive charge, the Committee of Creditors (CoC) approved a pari passu distribution of proceeds.
  
• DBS, as a dissenting financial creditor, challenged the plan before the NCLT and NCLAT, both of which dismissed its claims.
  
• The matter was brought before the Supreme Court.
  

Issues Before the Supreme Court

1. Does Section 30(2)(b)(ii) entitle a dissenting financial creditor to receive at least the minimum value of its security interest?
   
2. Should the amended Section 30(2)(b)(ii) apply to CIRPs that commenced before the amendment?
   
3. Must the distribution of resolution proceeds reflect the priority of security interests among secured creditors?
   

Arguments of the Parties

Appellant: DBS Bank Ltd Singapore

• Asserted that the resolution plan ignored its superior security interest, violating Section 30(2)(b)(ii).
  
• Argued that it was entitled to receive at least the liquidation value of its exclusive secured assets.
  
• Emphasized that the CoC’s commercial wisdom cannot override statutory safeguards for dissenting creditors.
  

Respondents: Ruchi Soya & Committee of Creditors

• Argued that Section 30(4) empowers the CoC to decide distribution, and dissenting creditors have no veto power.
  
• Relied on India Resurgence ARC Pvt. Ltd. v. Amit Metaliks Ltd. (2021), which held that dissenting creditors are not entitled to preferential treatment beyond liquidation value.
  
• Claimed the plan was lawfully approved by the majority and applied uniformly to all creditors.
  

Supreme Court’s Reasoning

1. Statutory Protection for Dissenting Creditors

• The Court observed that Section 30(2)(b)(ii) ensures minimum liquidation value to dissenting financial creditors.
  
• However, it questioned whether this protection had been effectively upheld in prior interpretations.
  

2. Potential Conflict with Past Precedents

• The Court noted a potential inconsistency between India Resurgence and earlier decisions such as:
  
  • Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta
  • Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC (India) Ltd.
• These judgments had emphasized equitable treatment and protection of dissenting creditors from disproportionate losses.
  

3. Larger Bench Reference

• Given the conflicting judicial views, the Court referred the interpretation of Section 30(2)(b)(ii) to a larger bench to decide whether:
  
  • A dissenting secured creditor is entitled to full security value, and
    
  • Distribution must respect security interest priorities, not just commercial wisdom of the CoC.
    

Key Takeaways

• The case spotlights tensions between statutory rights and commercial decisions in insolvency law.
  
• A larger bench will now determine the scope of protections available to dissenting secured creditors.
  
• The ruling could significantly impact how resolution plans are structured, particularly with regard to distribution hierarchy.
  

Conclusion

The Supreme Court’s referral in DBS Bank Ltd Singapore v. Ruchi Soya Industries Ltd. is poised to reshape the legal landscape regarding dissenting creditors’ rights under the IBC. Until the larger bench issues its ruling, insolvency professionals, resolution applicants, and financial creditors must tread cautiously, ensuring fairness and compliance with both statutory safeguards and commercial logic. This case reinforces the Court’s role in harmonizing procedural commercial discretion with fundamental creditor protections under Indian insolvency law.

FAQs:

1. What does Section 30(2)(b)(ii) of the IBC provide?

It mandates that dissenting financial creditors should receive at least the amount they would have received in a liquidation scenario, ensuring a statutory minimum entitlement.

2. Can the CoC override a dissenting creditor’s rights?

While the CoC has broad commercial discretion under Section 30(4), it cannot override statutory rights conferred under Section 30(2)(b)(ii).

3. What was the controversy in the DBS Bank case?

The dispute arose because DBS Bank held an exclusive first charge yet received pari passu treatment with other creditors, prompting questions on whether security priority must be respected.

4. What precedent is being reconsidered?

The ruling in India Resurgence ARC v. Amit Metaliks (2021), which downplayed the rights of dissenting creditors, is under review for possible inconsistency with earlier judgments.

5. What does this referral to a larger bench imply?

It indicates the Supreme Court’s intent to provide clarity on a recurring issue, potentially leading to a uniform and authoritative interpretation of dissenting creditors’ rights under IBC.

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