“The rightful claim to dissent is an existential right of the individual. - Friedrich Durrenmatt
In 2016, at a time when India’s Non-Performing Assets and debt defaults were piling up, with the existing loan recovery mechanisms such as the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) , Debt Recovery Tribunals were seen to be performing badly, the Insolvency and Bankruptcy Code (IBC) was introduced to overhaul the corporate distress resolution regime in India and consolidate previously available laws to create a time-bound mechanism with a creditor in -control model as opposed to the debtor-in-possession system.
The Code has transcended the confines of its objective by providing ways to resurrect and rehabilitate an ailing corporation from the path of corporate death and providing it with a new lease of life through the means of the Corporate Insolvency Resolution Process wherein the claims of the creditors are restructured and paid to them. The Code can be considered one of the most successful legislative experiments, which has proved to be more efficient in reviving corporates from the mouth of corporate death when compared to previous enactments such as Sick Industrial Companies (Special Provision) Act 1985(SICA), Recovery of Debts Due to Banks and Financial Institutions Act,1993(RDDBFI)Act etc. However, does all the creditors, especially the creditors who dissent to the process prescribed under the IBC, get equal treatment, which is analyzed in the article.
Dissenting Financial Creditor in IBC
As the IBC had adopted the creditor-in-control approach, the code entrusts the responsibility of revival and reorganization of a stressed company to financial creditors, not only because they can take crucial business decisions but also because their interests are aligned with the interests of the company having going concern, making it a positive sum game.[1] This clearly shows that the legislative intent of the Code is to ensure the survival of a company, and the creditors have been given the onus to make this into fruition.
When the Corporate Insolvency Resolution Process is initiated against a corporate debtor either by the creditors or by the corporate debtor themselves, it is followed by the appointment of an Interim Resolution Professional who, after collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor, constitute a Committee of Creditors (CoC)[2], and the process of appointment of Resolution Professional and formulation of a Resolution Plan ensues. In the process of selection of a viable Resolution Plan, the Code has given paramount importance to the decision of the Committee of Creditors (CoC) and has left the approval of a Resolution Plan entirely to the commercial wisdom of CoC.[3] The Resolution Plan cannot be passed without the approval of not less than 66% of the CoC.[4] However, not all the financial creditors need to be in consensus with the Resolution Plan. The code has recognised the rights of Financial Creditors who have noted their dissent to the approval of the Resolution Plan, and they are called dissenting financial creditors.
Section 2 (1)(f) of CIRP Regulations[5] defines “dissenting financial creditor” as a financial creditor who voted against the resolution plan or abstained from voting for the resolution plan approved by the committee”. The Supreme Court in Committee of Creditors of Essar Steel (India) Ltd. v. Satish Kumar Gupta[6] had held that “in a corporate insolvency resolution process, as per Section 30(2)(b)[7] a dissenting financial creditor would be entitled to at least what it would receive under Section 53(1) in case of liquidation (i.e., minimum liquidation value).” Thus, the dissenting financial creditors, secured or unsecured, are entitled to the payment of liquidation value due to them. Further, Regulation 38(1)(c) of the CIRP Regulation[8], which deals with mandatory contents of the resolution plan, states that “liquidation value due to dissenting financial creditors and provide that such payment is made before any recoveries are made by the financial creditors who voted in favour of the resolution plan.”
Therefore, as the renowned American Philosopher Eric Hoffer opined, “a dissenting minority feels free only when it can impose its will on the majority.” the position of the dissenting financial creditor in the IBC is also given the same standing, but being a nascent law, IBC is ever evolving especially through varied interpretations of the Tribunals by virtue of plethora of judgements. Does the tribunals also position the dissenting financial creditor in a similar standing as the code defines the real position of the dissenting financial creditor in law?
Judicial Pronouncements
The position of dissenting financial creditors has been the subject of debate for a long time, and the tribunals have interpreted this subject through several judgements.
The National Company Law Appellate Tribunal, in the case of DBS Bank Ltd v. Mr Shailendra Ajmera & Anr[9], dealt with a challenge by a dissenting financial creditor, who was seeking refuge under Section 30 of the amended act and thereby claiming for liquidation value. However, the NCLAT negatived the said submission by holding as follows:
“The Applicant is not challenging the resolution plan. The Applicant is only challenging the decision of the CoC as to distribution of the payment under the plan inter -se between the financial creditors of the corporate debtor (pursuant to the implementation of the plan) made therein”. The NCLAT upheld the decision of the CoC in the instant case. Further, the NCLAT in the case of SIDBI v. Vivek Raheja[10] held that “financial creditors that do not vote in favour of a resolution plan (i.e. dissenting financial creditors) are only entitled to receive “liquidation value of their debt and not distribution as per their security interest”. On a conjoined reading of both the judgements, it is clear regarding the distribution of liquidation value, the dissenting financial creditors are only entitled to receive the amount equivalent to their debt and the decision of the CoC regarding the distribution of value is given great importance.
This proposition was also greatly emphasized in the case of Committee of Creditors of Essar Steel Limited v. Satish Kumar Gupta and Ors[11], when the question arose whether the decision of CoC can come under the purview of judicial review, the Hon’ble Supreme Court of India held that “the consideration including priority in the scheme of distribution and the value of security are matters falling within the realm of Committee of Creditors, cannot be the subject of judicial review in appeal within the parameters of Sec 61(3) of the Code.” The Hon’ble Apex Court further held that “such business decision taken in exercise of commercial wisdom of Committee of creditors would not warrant judicial intervention unless creditors belonging to a class being similarly situated are not given a fair and equitable treatment.”
In the case, India Resurgence ARC Pvt LTD v. Amit Metaliks Ltd. & Anr[12], the Hon’ble Supreme Court upheld the decision of the NCLAT by stating that “If every financial creditor were given the option of individually coming up with its grievances, the purpose of having a CoC would be defeated if each financial creditor was given the choice of coming up with its own grievances. The decision rightly holds that a dissenting financial creditor cannot seek to impose a right above the rights of other financial creditors.” In the same case, the court observed that in the scheme of IBC, “every dissatisfaction does not partake the character of a legal grievance and cannot be taken up as a ground of appeal.”
From the analysis of the aforementioned judgments, it can be very clearly understood that the commercial wisdom of the Committee of Creditors has been given the liberty to determine what amounts to be paid to different classes and subclasses of creditors. Therefore, the dissenting financial creditors, though are entitled to value due to them in accordance with their debt, cannot claim a higher value than that of the assenting financial creditors, and this was held in the very recent judgement of the Hon’ble NCLAT pronounced on 14th of August, 2023 in the case of Peter Beck and Partner Vermoegensverwaltung GMBH v. Sharon Bio-medicine Limited & Ors wherein the Hon’ble Appellate Tribunal held that “we are of the view that assenting financial creditors are entitled for payment as proposed in the plan and dissenting financial creditor is entitled as per the minimum entitlement as per Sec 30(2) (b).
Conclusion
The United Nations Commission on International Trade Law, Legislative Guide on Insolvency Law [“UNCITRAL Guidelines”] discussing the treatment of dissenting financial creditors opined that “As to the treatment of dissenting creditors, it will be essential to provide a way of imposing a plan agreed by the majority of a class upon the dissenting minority in order to increase the chances of success of the reorganisation. It may also be necessary, depending upon the mechanism chosen for voting on the plan and whether creditors vote in classes, to consider whether the plan can be binding upon the dissenting classes of creditors and other affected parties”.
From the abovementioned view in UNCITRAL Guidelines to the present day, there has been a tremendous wave of change, especially post the amendment of the Code in the year 2019; it can be easily said that the position of dissenting financial creditor has improved with them getting a better standing and entitled to at least the liquidation value equivalent to their debt unlike the previous position of the law which had the risk of them getting crammed down into getting nothing by the 66% of the majority in the CoC. However, the inclination to support and uphold the decision of the CoC has been the recurring pattern followed by the Judiciary, and such a position is justified in the India Resurgence case wherein the apex court held that “It needs hardly any emphasis that if the propositions suggested on behalf of the appellant were to be accepted, the result would be that rather than insolvency resolution and maximisation of the value of assets of the corporate debtor, the processes would lead to more liquidations, with every secured financial creditor opting to stand on dissent. Such a result would be defeating the very purpose envisaged by the Code and cannot be countenanced”.
Altogether, it can be clearly understood that the dissenting financial creditors are still positioned precariously in IBC with specific improvements compared to the initial years of the code; however, the assenting majority in the CoC still retain an upper hand in the entire process.
Adv. Varsha Menon
Jr Associate, Artis Law House
[1] Report of the Working Group on Tracking Outcomes under the Insolvency and Bankruptcy Code,2016, 10th November 2021 [2] Section 21 of the Insolvency and Bankruptcy Code,2016 [3] Ayilyath, Manoranjan (2021), “The Question of Entitlement of Dissenting Creditors under IBC”. [S.l.]: SSRN https://ssrn.com/abstract=3871744. [4] Section 30(4) of the Insolvency and Bankruptcy Code [5] IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 [6] (2020) 8 SCC 531 [7] Insolvency & Bankruptcy (Amendment) Act, 2019 [8] Supra n 5 [9] (2019) ibclaw.in 446 NCLAT [10] MANU/NL/1198/2022 [11] Supra n 6 [12] [2021]6 SCR 611