To Dissent or Not to Dissent? Safeguards Available to Dissenting Financial Creditors

[2021] 129 taxmann.com 82 (Article)

India’s prime corporate restructuring tool, the Insolvency and Bankruptcy Code, 2016 (the “Code”) recently crossed the milestone for half a decade in existence and continues to be the talk of the town when it comes to stressed assets in the country, as it has always been since its inception. One of the many interesting facets of the Code is that of the concept of a dissenting financial creditor. This article aims to look at how the concept of dissenting financial creditors and their treatment has evolved over the years, through a few judicial pronouncements, albeit the words “dissenting financial creditors” no longer actually appear in the texts of the Code.

Background

Initially, a dissenting financial was defined under section 2(1)(f) of the Code as a financial creditor who voted against the resolution plan or abstained from voting for the resolution plan, approved by the committee. However, this was done away with by a notification1 dated 5th October 2018, through an amendment that came right on the heels of the judgement of the National Company Law Appellate Tribunal (“NCLAT”) in Central Bank of India v. Resolution Professional of the Sirpur Paper Mills Ltd.2, where it was seen that the Regulation 38 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”), as it stood before, was inconsistent with the Code. It was observed that a resolution plan, that provided for liquidation value for dissenting financial creditors as per sub-regulation (c) of Regulation 38 (as it stood prior to the 2019 amendment) without any other reason to discriminate between two sets of creditors similarly situated such as financial creditors or the operational creditors cannot be approved, being illegal.

Relying on Sirpur Paper Mills (supra), Hon’ble NCLAT upheld the fair and equitable treatment that is to be accorded to creditors and in Binani Industries Ltd. v. Bank of Baroda3, holding that any resolution plan if shown to be discriminatory against one or other financial creditor or the operational creditor, who are equally situated, such plan can be held against the provisions of the Code.

Safeguards to dissenting financial creditors

The UNCITRAL Legislative Guide on Insolvency Law4 discussing the importance of ‘cramming down’ or imposing a plan on the minority dissenting financial creditors for successful reorganisation, felt it was imperative that appropriate protection is afforded to dissenting parties. It is recommended that the law might provide, for example, that dissenting creditors cannot be bound by a resolution plan until and unless assured of a certain treatment. While the Banking Law Reforms Committee Report suggested that the successful resolution plan vote will also involve a cram down option on any dissenting creditors once the majority vote is obtained, it was largely silent on a guaranteed minimum payment to such dissenting creditors. However, the Insolvency Law Committee Report of March 20185, thought it best not to tinker with the minimum value guaranteed to dissent financial creditors and their right to prior payment over assenting financial creditors statutorily.

Section 30 of the Code was amended6 in 2019 to provide that debts of financial creditors, who do not vote in favour of the resolution plan shall not be less than the amount to be paid to such creditors in accordance with sub-section (1)of Section 53 (Distribution of assets) in the event of a liquidation of the corporate debtor. Similarly, in the amended Regulation 38 of the CIRP Regulations (Mandatory contents of the resolution plan) the words “dissenting financial creditors” is altogether omitted and with effect from November 2019 provides that financial creditors who did not vote for the plan shall be paid in priority over financial creditors who voted in favour of the plan.

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