SUPREME COURT REFERS THE ISSUE OF PAYING A DISSENTING FINANCIAL CREDITOR THE MINIMUM VALUE OF ITS SECURITY INTEREST TO A LARGER BENCH

A two-Judge Bench of the Supreme Court comprising of Justice Sanjiv Khanna and Justice S.V.N Bhatti passed a Judgment dated 03-01-2024 in the matter of DBS Bank Limited Singapore vs. Ruchi Soya Industries Limited and Another Civil Appeal No. 9133 / 2019 and observed that if a financial creditor disagrees with the Resolution Plan, then they have the right to refuse to receive any share in the proceeds unless the plan approves a higher payment in line with their security interest. Further, the payment owed to the dissenting financial creditor should be in alignment with Section 53(1) (Distribution of Assets)[i] of the Insolvency and Bankruptcy Code (IBC), 2016 in the event of the liquidation of the Corporate Debtor.

FACTS:

i) That the aforesaid Appeal was filed before the Supreme Court by the DBS Bank Limited Singapore (Appellant) against the Ruchi Soya Limited (Respondent No.1), and the Committee of Creditors (Coc) (Respondent No.2), challenged the Order of the Hon’ble National Company Law Appellate Tribunal (NCLAT) which dismissed the Appeal against the Order of the National Company Law Tribunal (NCLT) vide Order dated 18.11.2019 and 09.12.2019.

ii) The Appellant extended a Financial Debt of USD 50,000,000 (Fifty Million Dollars) or Rs. 243,00,00,000 (Rupees Two Hundred Forty-Three Crore) to M/s. Ruchi Soya Industries Limited (the Corporate Debtor). This Financial Debt was secured by the (I) sole and exclusive Charge of over certain immovable and fixed assets of the Corporate Debtor in Kandla, Gujarat, and (II) sole and exclusive charge over assets in Baran, Rajasthan; Guna, Madhya Pradesh; Dalauda, Madhya Pradesh; Gadarwara, Madhya Pradesh; and commercial office space at Nariman Point, Mumbai.

iii) The Corporate Insolvency Resolution Process (CIRP) was initiated on 15.12.2017 under the IBC. The Company Petition seeking to initiate CIRP was admitted, and a Resolution Professional was appointed. The Appellant submitted its claim, which was admitted for Rs. 242,96,00,000 (Rupees Two Hundred Forty-Two Crore Ninety-Six Lakh Only).

iv) Further, one Patanjali Ayurvedic Limited submitted a Resolution Plan for Rs. 4134,00,00,000 (Rupees Four Thousand One Hundred Thirty-Four Crore Only) against the aggregate claims of around Rs. 8398,00,00,000 (Rupees Eight Thousand Three Hundred Ninety-Eight Crore Only), represented approximately 49.22% of the total admitted claims of financial creditors.

v) The Appellant informed the Committee of Creditors (CoC) on 12.04.2019 that the security held by the Appellant was of greater value compared to collaterals held by other creditors. The Appellant requested the CoC to consider the liquidation value of such security during the distribution of proceeds in a “fair and equitable” manner.

vi) Thereafter, at the 21st and 22nd CoC meetings, the Appellant’s concern regarding treatment / proposed pay-out was noted. However, in the meeting on 23.04.2019, the CoC approved pari-passu (ranking equally and without preference) distribution of the Resolution Plan proceeds. Further, the Resolution Plan was approved by 96.95% of the CoC on 30.04.2019. The Appellant, a dissenting Financial Creditor, challenged the distribution mechanism of the Resolution Plan proceeds before the National Company Law Tribunal (NCLT), Mumbai.

vii) Consequently, the NCLT granted provisional/conditional approval to the Resolution Plan and dismissed the Appellant’s Application challenging the distribution mechanism of the Resolution Plan proceeds on 24.07.2019. Aggrieved by the Order dated 24.07.2019, the Appellant challenged the dismissal before the NCLAT on 31.07.2019.

viii) During the Appeal’s pendency, the Insolvency and Bankruptcy Code (Amendment) Act, 2019, was notified on 16.08.2019, and amending Section 30(2)(b) (Submission of Resolution Plan)[ii] of the IBC, 2016. The Appellant, at the 26th CoC meeting on 30.08.2019, requested reconsideration of the distribution of the resolution proceeds in light of the amendments. The CoC did not accept the prayer, and cited the pending Appeal before the NCLAT and the ambiguity in the amendments.

ix) Subsequently, the NCLT approved the Resolution Plan on 30.08.2019, and the Appellant challenged this Resolution Plan before the NCLAT on 11.10.2019. Furthermore, the first NCLAT Appeal by the Appellant, filed on 31.07.2019, was still pending.

x) The NCLAT, by Orders dated 18.11.2019 and 09.12.2019, dismissed both the Appeals.

SUPREME COURT:

Aggrieved by the Order dated 18.11.2019 and 09.12.2019 of the NCLAT, the Appellant filed Civil Appeal No. 9133 / 2019 which was registered on 29-11-2019, thereby challenging the dismissal as decided by the NCLAT. The Supreme Court issued notice on 06.12.2019. In an interim Order, the Supreme Court directed the deposit of Rs. 99,74,00,000/- (Rupees Ninety-Nine Crore Seventy-Four Lakh Only) in an escrow account, being the difference between the amount the Appellant would have received under the amendments and the amount received through pro-rata (proportional distributions) distribution of proceeds.

ISSUE:

I) The primary issue before the Supreme Court is whether the amendments made in the substantive portion of Section 30(2) of the Insolvency and Bankruptcy Code, as introduced by the Insolvency and Bankruptcy Code (Amendment) Act, 2019, and explained by Explanation 2, are applicable to the first Appeal filed by the Appellant before the National Company Law Appellate Tribunal (NCLAT). The Amendment Act was notified and came into effect on 16.08.2019, while the Appellant had filed the first Appeal on 31.07.2019, challenging the provisional approval Order passed by the National Company Law Tribunal (NCLT) on 24.07.2019.

II) The second question before the Supreme Court involves the interpretation of Section 30(2)(b)(ii) of the Insolvency and Bankruptcy Code. The key issue is determining whether, according to this section, a dissenting financial creditor is entitled to a payment amount that is not less than what would be payable under Section 53(1) in the event of the liquidation of the corporate debtor.

OBSERVATION:

1) The Supreme Court had rejected the submission that Section 30(2)(b)(ii) of the Insolvency and Bankruptcy Code (IBC) is unworkable because it involves a deeming fiction relating to liquidation, which is deemed inapplicable during the Corporate Insolvency Resolution Process (CIRP) period. Further, the Apex Court emphasized that such an interpretation would be contrary to legislative intent and unacceptable.

2) Further, the Bench did not accept the Respondent no. 2, i.e., the Committee of Creditors (CoC), argument that the proceeds under the Resolution Plan, should be distributed pro-rata as per the Resolution Plan making Section 30(2)(b)(ii) inapplicable. The Court rejected this argument, clarifying that Section 30(2)(b)(ii) pertains to the proportion of proceeds or the amount dissenting financial creditors would be entitled to under Section 53(1) in case of liquidation. The dissenting financial creditor has the statutory option to object to the distribution of proceeds if it is less than what they would receive under Section 53(1) in the event of liquidation.

3) The Apex Court addressed the objections raised by the Appellant in CoC meetings, emphasized that related to the distribution of proceeds in terms of the liquidation plan, asserting their entitlement to an amount not less than what Section 53(1) specifies. Regarding the contention that there is a conflict between Section 30(4), as amended in 2019 and the amended clause (b) to sub-section (2) of Section 30, the Court stated that no conflict arises. Section 30(4) outlines considerations for the CoC in approving a Resolution Plan, including feasibility, viability, and the manner of distribution, but the CoC does not need to provide each assenting party with the liquidation value. The Court clarified that the conflict does not arise as Section 30(2)(b)(ii) relates to the minimum payment for an operational or dissenting financial creditor.

CONCLUSION:

Based on the aforementioned facts the Supreme Court referred the matter to a larger bench and rejected the argument that Section 30(2)(b)(ii) of the Insolvency and Bankruptcy Code is unworkable during the Corporate Insolvency Resolution Process (CIRP) period, emphasized that such an interpretation goes against legislative intent. The Court clarified that dissenting financial creditors have the statutory right to object to the distribution of proceeds under a Resolution Plan if it is less than their entitlement under Section 53(1) in the event of liquidation. Further, the Bench dismissed the contention that the Appellant dissented only on the distribution manner, stating that Section 30(2)(b)(ii) applies to the proportion of proceeds. The Court also addressed the lack of conflict between Section 30(4) and the amended clause in Section 30(2)(b), emphasizing the different considerations they involve.

Hence, in light of a differing interpretation from a previous judgment, the Supreme Court decided to refer the matter to a larger Bench for further consideration and clarity.

 

Sakshi Raghuvanshi

Legal Associate

The Indian Lawyer

 

[i] Section 53 of IBC, 2016.   Distribution of assets.

(1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following Order of priority and within such period and in such manner as may be specified, namely:—

(a) the insolvency resolution process costs and the liquidation costs paid in full;

(b) the following debts which shall rank equally between and among the following:—

(i) workmens dues for the period of twenty-four months preceding the liquidation commencement date; and

(ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52;

(c) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;

(d) financial debts owed to unsecured creditors;

(e) the following dues shall rank equally between and among the following:—

(i) any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;

(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;

(f) any remaining debts and dues;

(g) preference shareholders, if any; and

(h) equity shareholders or partners, as the case may be.

(2) Any contractual arrangements between recipients under sub-section (1) with equal ranking, if disrupting the Order of priority under that sub-section shall be disregarded by the liquidator.

(3) The fees payable to the liquidator shall be deducted proportionately from the proceeds payable to each class of recipients under sub-section (1), and the proceeds to the relevant recipient shall be distributed after such deduction.

Explanation.— For the purpose of this section—

(i) it is hereby clarified that at each stage of the distribution of proceeds in respect of a class of recipients that rank equally, each of the debts will either be paid in full, or will be paid in equal proportion within the same class of recipients, if the proceeds are insufficient to meet the debts in full; and

(ii) the term “workmen’s dues” shall have the same meaning as assigned to it in section 326 of the Companies Act, 2013 (18 of 2013).

 

 

[ii] Section 30 of IBC, 2016.   Submission of Resolution Plan.

 

(1) A resolution applicant may submit a Resolution Plan 1[along with an affidavit stating that he is eligible under section 29A] to the resolution professional prepared on the basis of the information memorandum.

(2) The resolution professional shall examine each Resolution Plan received by him to confirm that each Resolution Plan–

(a) provides for the payment of insolvency resolution process costs in a manner specified by the Board in priority to the 2[payment] of other debts of the corporate debtor;

3[(b) provides for the payment of debts of operational creditors in such manner as may be specified by the Board which shall not be less than–

(i) the amount to be paid to such creditors in the event of a liquidation of the corporate debtor under section 53; or

(ii) the amount that would have been paid to such creditors, if the amount to be distributed under the Resolution Plan had been distributed in accordance with the Order of priority in sub-section (1) of section 53,

whichever is higher and provides for the payment of debts of financial creditors, who do not vote in favour of the Resolution Plan, in such manner as may be specified by the Board, which shall not be less than the amount to be paid to such creditors in accordance with sub-section (1) of section 53 in the event of a liquidation of the corporate debtor.

Explanation 1.–For the removal of doubts, it is hereby clarified that a distribution in accordance with the provisions of this clause shall be fair and equitable to such creditors.

Explanation 2.– For the purposes of this clause, it is hereby declared that on and from the date of commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2019, the provisions of this clause shall also apply to the corporate insolvency resolution process of a corporate debtor–

(i) where a Resolution Plan has not been approved or rejected by the Adjudicating Authority;

(ii) where an appeal has been preferred under section 61 or section 62 or such an appeal is not time barred under any provision of law for the time being in force; or

(iii) where a legal proceeding has been initiated in any court against the decision of the Adjudicating Authority in respect of a Resolution Plan;]

(c) provides for the management of the affairs of the Corporate debtor after approval of the Resolution Plan;

(d) the implementation and supervision of the Resolution Plan;

(e) does not contravene any of the provisions of the law for the time being in force;

(f) conforms to such other requirements as may be specified by the Board.

4[Explanation.– For the purposes of clause (e), if any approval of shareholders is required under the Companies Act, 2013 or any other law for the time being in force for the implementation of actions under the Resolution Plan, such approval shall be deemed to have been given and it shall not be a contravention of that Act or law];

(3) The resolution professional shall present to the committee of creditors for its approval such Resolution Plans which confirm the conditions referred to in sub-section (2).

5[(4) The committee of creditors may approve a Resolution Plan by a vote of not less than 6[sixty-six] per cent. of voting share of the financial creditors, after considering its feasibility and viability, 7[the manner of distribution proposed, which may take into account the Order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor] and such other requirements as may be specified by the Board:

Provided that the committee of creditors shall not approve a Resolution Plan, submitted before the commencement of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017(Ord. 7 of 2017), where the resolution applicant is ineligible under section 29A and may require the resolution professional to invite a fresh Resolution Plan where no other Resolution Plan is available with it:

Provided further that where the resolution applicant referred to in the first proviso is ineligible under clause (c) of section 29A, the resolution applicant shall be allowed by the committee of creditors such period, not exceeding thirty days, to make payment of overdue amounts in accordance with the proviso to clause (c) of section 29A:

Provided also that nothing in the second proviso shall be construed as extension of period for the purposes of the proviso to sub-section (3) of section 12, and the corporate insolvency resolution process shall be completed within the period specified in that sub-section.]

8[Provided also that the eligibility criteria in section 29A as amended by the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 shall apply to the resolution applicant who has not submitted Resolution Plan as on the date of commencement of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018.]

(5) The resolution applicant may attend the meeting of the committee of creditors in which the Resolution Plan of the applicant is considered:

Provided that the resolution applicant shall not have a right to vote at the meeting of the committee of creditors unless such resolution applicant is also a financial creditor.

(6) The resolution professional shall submit the Resolution Plan as approved by the committee of creditors to the Adjudicating Authority.