Interpretation of Section 30(2)(b) of the IBC: Reference to a larger bench by Supreme Court in Ruchi Soya flawed

When the second round of litigation in Essar Steel India Ltd Committee of Creditors v. Satish Kumar Gupta, (2020) was heard by the Supreme Court, amongst others, the amendment to Section 30(2)(b), which was brought into effect on August 16, 2019, was discussed by Justice Rohinton Nariman in paragraph 80 of the judgment..In effect, the said amendment provided the minimum liquidation value to operational creditors and dissenting financial creditors in a resolution plan. It was held that this provision is to ensure that the majority in the Committee of Creditors does not “cram down” the interests of operational and dissenting financial creditors..After Essar’s judgment, three judgments of the Supreme Court had occasion to deal with the provisions of Section 30 of IBC relating to approval of a resolution plan. The first is the judgment in India Resurgence ARC (P) Ltd v. Amit Metaliks Ltd (2021). In this case, the key issue dealt with was about a dissenting financial creditor who claimed that the amount provided under the resolution plan was much lower than the security value. After discussing the factual aspect, it was observed,“The extent of value receivable by the appellant is distinctly given out in the resolution plan i.e. a sum of INR 2.026 crores which is in the same proportion and percentage as provided to the other secured financial creditors with reference to their respective admitted claims. Repeated reference on behalf of the appellant to the value of security at about INR 12 crores is wholly inapt and is rather ill-conceived."Dealing with the scope of Section 30(2)(b) vis-à-vis dissenting financial creditors, it was held,“It is not the intent of the legislature that a security interest available to a dissenting financial creditor over the assets of the corporate debtor gives him some right over and above the other financial creditors so as to enforce the entire of the security interest and thereby bring about an inequitable scenario, by receiving excess amount, beyond the receivable liquidation value proposed for the same class of creditors.".This was followed by the judgment in Vistra ITCL (India) Ltd v. Dinkar Venkatasubramanian (2023). This is an interesting judgment where the Supreme Court was concerned with rights of a secured creditor, who was neither a financial nor an operational creditor. The Supreme Court interfered with an approved resolution plan and directed the successful resolution applicant to exclude the asset over which security interest was created or pay an amount equal to the security value before proceeding to implementing the resolution plan..The third judgment is DBS Bank Ltd v. Ruchi Soya Industries Ltd (2024). In this case, despite observing that a dissenting secured financial creditor cannot be better placed than an assenting secured financial creditor, it was held that the dissenting financial creditor must be paid a sum equal to the security interest. It faulted the judgment in India Resurgence by holding that it was contrary to the ratio in Jaypee Kensington and Essar. It therefore referred the issue to a larger bench. The relevant portion states,"Our reasoning finds resonance in the reasoning given in Jaypee Kensington...which states that for the purpose of discharge of obligation mentioned in the second part of Section 30(2)(b) of the Code, the dissenting financial creditors are to be paid an amount quantified in terms of the proceeds of assets receivable under Section 53 of the Code...What the dissenting financial creditor is entitled to is the payment, which should not be less than the amount/value of the security interest held by them. The security interest gets converted from the asset to the value of the asset, which is to be paid in the form of money.”.The reference to a larger bench was unnecessary. In paragraph 29 of Ruchi Soya, then Chief Justice of India Sanjiv Khanna, who authored the judgment, had observed: "A dissenting financial creditor cannot take advantage of Section 30(2)(b)(ii). A secured creditor cannot claim preference over another secured creditor at the stage of distribution on the ground of a dissent or assent, otherwise the distribution would be arbitrary and discriminative. The purpose of the amendment was only to ensure that a dissenting financial creditor does not get anything less than the liquidation value, but not for getting the maximum of the secured assets.” The judgment also failed to note that India Resurgence, in paragraph 20, had duly noted the ratio in Jaypee Kensington and rightly observed:“In Jaypee Kensington...this Court repeatedly made it clear that a dissenting financial creditor would be receiving the payment of the amount as per his entitlement; and that entitlement could also be satisfied by allowing him to enforce the security interest, to the extent of the value receivable by him. It has never been laid down that if a dissenting financial creditor is having a security available with him, he would be entitled to enforce the entire of security interest or to receive the entire value of the security available with him. It is but obvious that his dealing with the security interest, if occasion so arise, would be conditioned by the extent of value receivable by him…”.The reasoning in Ruchi Soya is flawed for another reason. The plain language used in 30(2)(b) is that payment to dissenting creditors shall not be less than the amount paid to such creditors and does not provide for amount equal to the security interest. Explanation 1 to 30(2)(b) also provides for fair and equitable treatment of creditors similarly placed. This affirms the ratio in India Resurgence.The reference to a larger bench by faulting the ratio in India Resurgence is therefore quite flawed and hopefully the larger bench agrees with the reasoning in India Resurgence..Shri Venkatavaradan