Creditor-in-Control: How DFCs Can Ride Into the Horizon or Off a Cliff

Joshua Joseph Jose & Rajnandan Gandhi*

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I. INTRODUCTION

The treatment of dissenting financial creditors’ (‘DFCs’) rights under the insolvency regime in India has been vacillating, and the existing literature on the subject has not adequately considered the broader implications of the Supreme Court of India (‘SC’)’s ruling in DBS Bank v. Ruchi Soya Industries (‘Ruchi Soya’).

Here, the Court held that a secured DFC is entitled to a minimum liquidation value (‘MLV’) under Section (2)(b)(ii) of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) —  calculated based on the value of the security interest created in their name. By doing so, the Court disagreed with its earlier decision in India Resurgence ARC Private Limited v. Amit Metaliks Limited & Another (‘India Resurgence’) where it held that the MLV should be calculated based on the creditor’s debt exposure and proportionate voting share, despite their contractual entitlement to the security interest. Due to such split opinion, the Court, in Ruchi Soya, referred the matter to a larger bench which has not been taken up, as of the time of writing.

The authors argue that a measured approach must be taken: The position in Ruchi Soya protects secured creditors’ rights and adds to a business-friendly environment. However, India Resurgence, while diluting the sanctity of contractual obligations, raises valid concerns regarding the increased proclivity to dissent among secured creditors, which may lead to more liquidations, which adversely affects business.

Part II explores how the precedent laid down by Justice Khanna in Ruchi Soya requires reading Sections 52 and 53 together so that the DFCs preserve their security interests. Part III critiques India Resurgence for eroding contractual sanctity by subjecting DFCs to the discretion of the Committee of Creditors (‘CoC’). Part IV addresses concerns that enforcing creditor rights could trigger liquidations, hindering resolutions. Part V proposes legislative reforms to clarify the IBC’s provisions and protect security interests while supporting restructuring. Part VI concludes by advocating a balanced approach aligning with global norms that enhances market confidence.

II. THE INTERPRETATION IN DBS BANK V. RUCHI SOYA: A STEP TOWARDS HARMONISATION

For a resolution plan to pass, it must obtain the approval of 66% of the CoC, calculated based on the debt exposure of financial creditors (‘FC’), regardless of whether they are secured or not. The corporate debtor (‘CD’) proceeds to liquidation if the required approval is not obtained. It is important to note that the CoC’s approval is subject to the discretion of the National Company Law Tribunal (‘NCLT’). Section 30(2)(b) of the IBC imposes a duty on the resolution professional and, thereby, the NCLT to ensure that the resolution plan provides for the operational creditors and DFCs within the CoC of the CD.

The pressing question before Court revolves around the extent and nature of the duty owed by a resolution plan to DFCs. The IBC mandates that the plan provide for “the payment of debts of financial creditors who do not vote in favour of the resolution plan, [...] 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.” Evidently, DFCs are entitled to receive an amount equivalent to what they would have received if the resolution had failed and the CD had undergone liquidation.

Concerning the duty, two interpretations have arisen owing to doubts surrounding MLV assured to dissenters under section 53(1) of the IBC. One interpretation of this provision, reflected in India Resurgence, is that it grants priority to secured creditors, assuming that they have relinquished their specific security interests to the liquidator, becoming pari passu among themselves, regardless of the exclusivity or priority of their original security arrangements. The alternative view, supported by Ruchi Soya, argues that section 52 allows secured creditors to enforce their security interests during liquidation proceedings. This interpretation ensures that DFCs are entitled to receive at least the value of their security interest, up to the amount necessary to satisfy their debt, if the resolution plan passes. Consequently, section 53(1), as referenced in section 30(2)(b)(ii), must be read in conjunction with section 52 to ensure harmonious construction. This approach gives full effect to the enactment’s intention to mirror the payouts creditors would receive in an actual liquidation scenario.

Understanding the treatment afforded to operational creditors under section 30(2)(b) requires interpreting section 53 in the context of a liquidation scenario. Justice Sanjiv Khanna, author of the Ruchi Soya judgment, had already explained how the provision ought to be interpreted in M/S Vistra ITCL (India) Ltd. & Ors. v. Mr. Dinkar Venkatasubramanian & Anr (‘Vistra’). In Vistra, the Court confronted a scenario in which a secured creditor fell outside the ambit of what the law recognised as a ‘financial and operational creditor’. Thus, despite possessing a security interest lawfully bargained for, the creditor would be deprived of the protections typically afforded to such parties.

Justice Khanna subsequently contemplated overruling the division bench judgments of the SC in Anuj Jain v. Axis Bank Ltd. & Ors. and Phoenix ARC Pvt. Ltd. v. Ketulbhai Ramubhai Patel, which constrained the definition of a financial creditor in a manner that excluded the type of creditors as was seen in Vistra. However, given the protracted nature of the overruling process—necessitating a reference to a larger bench—the Court determined that an expedient means to secure justice was to afford the secured creditor all the rights available to secured creditors, including the option not to relinquish the security interest in favour of the liquidation estate. In doing so, the Court interpreted section 53 in conjunction with section 52 rather than in isolation.

Therefore, if section 53 is read in isolation and the DFC is precluded from receiving at least the value of their security interest until their debt obligation is fully satisfied, we would be placing secured FCs in a worse position compared to those secured creditors who are neither financial nor operational creditors. This creates an inequitable situation in which the secured FC is not only deprived of the ability to enforce their security interest but is also denied a value equivalent to the security interest up to the point at which the debt obligation is fulfilled, simply due to their classification as a financial or operational creditor.

III. THE IMPLICATIONS OF INDIA RESURGENCE: DILUTING CONTRACTUAL SANCTITY

The decision in India Resurgence holds that a secured creditor is not entitled to the value of its specific security interest. This applies even in cases where the secured FC opposes the resolution plan approved by the majority of the CoC. This undermines the sanctity of contractual agreements by violating the doctrine of privity of contract, as it allows non-parties to the agreement—namely, the assenting creditors in the CoC—to determine the fate of a contractual arrangement between the DFC and the CD.

Secured credit plays a crucial role in the economy by reducing credit risk and offering lower interest rates due to the minimised loss in the event of default. Consequently, reducing the safety offered by the collateral contracts vis-à-vis adopting the position in India Resurgence, risks undermining lenders’ confidence, leading to reduced investment and limited credit availability; resulting in unfavourable business conditions. Thus, resulting in outcomes that contradict the IBC’s core objectives.

The dilution of contractual terms under the IBC is not an isolated occurrence but part of a broader trend, as highlighted by Amrit Mahal and Varun Akar, which reflect the wider implications of decisions like India Resurgence. Mahal critiques the moratorium for restricting counterparties’ rights to terminate contracts, forcing them to uphold agreements detrimental to their financial stability to preserve the distressed company’s continuity. Similarly, Akar highlights how assenting FCs in the CoC often approve resolution plans that extinguish third-party liabilities, including personal guarantors’ obligations, thereby eroding dissenting creditors’ recovery rights. These effects of the IBC, combined with the India Resurgence’s stance, underscore a troubling trend: prioritising the CD’s revival over the sanctity of contractual agreements and the broader economic stability secured credit aims to ensure.

This is not to say that the reasoning in India Resurgence is entirely flawed. To better understand its merits, assume a hypothetical situation, which can be likened to the Prisoner’s Dilemma: A & B are two secured FCs to a CD. Neither knows if the other will choose to dissent or assent to the plan.

Fig 1: Representation of the ‘Prisoner’s Dilemma’

In Quadrant III, if A dissents and B assents, A can “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” and increase the likelihood of liquidation. If A is owed ₹50 and has a security worth ₹30 but only stands to gain ₹25 through resolution, A gains more by enforcing the security. Here, B is relinquishing the security due to them and opting to submit themselves to the mercy of the CoC. However, since A is choosing to exercise their contractual due, the estate the plan can draw from is reduced, and vice versa if B dissents and A assents. Vice versa if B dissents and A assents, as seen in Quadrant II.

The problem with the above scenario is that neither A nor B knows how the other creditors may vote and thus, tilt the scales in their respective favour. Due to this uncertainty, they may choose the ‘safe’ option: dissent and exercise their right over the security to ensure an assured, speedy payout. A creditor would hardly take a chance with the resolution, where they may only recover a meagre value or liquidation, where the realised payout is likely to be lower than the estimates. Adopting the position in Ruchi Soya legitimises this behaviour, which seems to have better commercial sense but leads to more liquidations as FCs, with sufficient voting shares, would rather choose to enforce the securities than take the ‘risky’ options.

IV. ADDRESSING CONCERNS ABOUT RESOLUTION VIABILITY

A)   Need for Resolutions

In India Resurgence, the Court expressed concern that allowing DFCs to receive payments equivalent to their specific security interests until their debts are fully satisfied might incentivise liquidation. While the concern is valid, addressing it by undermining credit availability in an economy that urgently requires credit and investment to stimulate demand and growth is counterproductive. As Suharsh Sinha observes, lenders with limited debt exposure to distressed companies are increasingly hesitant to initiate insolvency proceedings due to the risk of being unfairly crammed down the priority order in a resolution plan—even when they hold exclusive security. This reluctance to initiate timely insolvency proceedings delays essential restructuring efforts, thereby worsening value destruction. As a result, businesses that are initially only financially distressed—meaning their debt exceeds their present value but they still hold potential as going concerns—are allowed to deteriorate to the point of economic distress, where the value of the business as a whole falls below the sum of its parts if sold off separately. This transition reduces the likelihood of successful resolutions and increases the risk of inefficient liquidations.

At this juncture, it must be considered whether resolution plans should be promoted in the first place and liquidations deterred until necessary. The Bankruptcy Law Reforms Committee, which drafted the IBC, in its report stated “...there may be many situations in which a viable mechanism can be found through which the firm is protected as a going concern. To the extent that this can be done, the costs imposed upon society go down, as liquidation involves the destruction of the organisational capital” of the firm. This indicates that the legislative intent was to encourage restructuring and resolutions while discouraging liquidations. However, during the Lok Sabha discussion at the time of passing the Insolvency and Bankruptcy Bill, a member observed that “(B)ankruptcy should not necessarily be a stigma like in the case of Kingfisher. It is because today if you give me ease of exit, then I can again start another business.” There were similar observations made by other members, indicating that the larger idea behind IBC may have been to not just improve the likelihood of resolutions, but also to promote a business-friendly environment where it is easy to start a new business on the proverbial ashes of a gone concern.

B) International Best Practices

The World Bank’s Doing Business report examines the time, cost, and outcomes of insolvency proceedings involving domestic legal entities across jurisdictions. It evaluates each regime’s ability to resolve insolvency based on multiple metrics, assigning scores for its resolution and overall efficiency. Finland’s insolvency regime ranks first in both categories, followed by the United States of America (‘U.S.’), from which Finland drew significant inspiration for its restructuring framework. The Finnish Restructuring of Enterprises Act, 1993, provides that a resolution plan must not alter the existence or substance of a creditor’s real security rights in section 45(2).

However, it permits modifications to security arrangements by substituting existing security with fully adequate alternatives. §1129(b)(2)(A) of Chapter 11 of the U.S. Bankruptcy Code embodies a comparable principle. This framework aligns with the reasoning in Ruchi Soya, where the court, drawing on the UNCITRAL Legislative Guide on Insolvency, held that a DFC is entitled to an amount equal to the value of their security interest until the debt is fully discharged. These jurisdictions are not unique in ensuring that secured dissenting creditors receive at least the value of their security interest. This is largely because Chapter 11 serves as the foundation for many restructuring frameworks worldwide and reflects the global emphasis on upholding the sanctity of contracts. The following is a table containing the positions of notable jurisdictions:

Jurisdiction	Legislation	Provision	Entitled to at least the value of their security interest?	Resolving Insolvency Rank
Japan	Corporate Reorganization Act, 2002	Art.104(1)	YES	3
Germany	Act on the Stabilisation and Restructuring Framework for Businesses	Section 64	YES	4
Norway	Debt Negotiation and Bankruptcy Act, 1984	Section 55	YES	5
Netherlands	The Act on the confirmation of private restructuring plans	Art. 384(4)(c)	YES	7

VI. WAY FORWARD

To resolve interpretive ambiguities in liquidation hierarchies, statutory construction must affirm that section 53 operates conjunctively with section 52, preserving secured creditors’ entitlement to retain priority over unsecured claims without surrendering security interests. However, this interplay introduces uncertainty regarding permissible creditor actions concerning collateral. Legislative intervention should clarify that while secured creditors retain priority to the value of their security interest (or its indubitable equivalent) up to the extent of the debt obligation, enforcement rights over the collateral remain restricted.

This limitation serves a critical policy objective: safeguarding assets vital to corporate restructuring. For instance, liquidating essential operational assets (e.g., strategically located commercial premises) could undermine rehabilitation efforts, diminishing creditor recovery prospects by eroding the debtor’s going-concern value.

The ‘indubitable equivalent’ standard, rooted in U.S. restructuring law, is adopted to provide stakeholders in resolution proceedings flexibility to reconcile the value of security interests, particularly through mechanisms to satisfy secured DFCs. This framework permits alternatives such as (1) liens on functionally similar collateral, requiring replacement assets to match the original in value and purpose;[1] (2) asset payment plans, where transferring the security interests monetised value—as defined under section 3(31) of the IBC—satisfies the claim; (3) third-party equity securities, exemplified by settlements combining cash, stock in a purchaser entity, or guarantees;[2] and (4) hybrid mechanisms, such as court-approved combinations of staggered payments, collateral substitution, partial abandonment, and deferred settlements.[3] By accommodating these methods, the standard ensures creditors receive value parity — not identical form — while preserving restructuring-critical assets. Here, the authors are cognizant of the SC’s ruling in Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC (India) Ltd which strictly interpreted “payment” and “amount payable” under Section 30(2) to mean only cash or monetary terms. However, this appears counterproductive as it goes against the IBC’s objective of promoting resolutions. The following are suggestions may be inserted into section 30, to remove such ambiguities:

“…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 read with section 52 in the event of a liquidation of the corporate debtor.”

“Explanation 3.—For the removal of doubts, it is hereby clarified that the financial creditor who did not vote in favour of the resolution plan, in the event that it is approved, is not permitted to enforce their security interest; instead, they are limited to the value of that security interest or its indubitable equivalent, in cash or otherwise, up and until the satisfaction of its admitted claims.” 

In addition to the above amendments, another change may be made by passing a regulation: A mode of eliminating dissent would be to empower the interim resolution professional to treat certain classes in a manner similar to homebuyers under the IBC.

Based on their risk aversion, certain secured creditors of similar characteristics would be identified and classified as a collective bloc, based on the discretion of the RP, appointed by a special majority of the CoC, on a case-by-case basis. They would make decisions collectively by voting at a dedicated meeting, where their representative gathers all class members. Any decision approved by a majority at that meeting will be binding on both the representative and all the members. To elaborate: In an internal class meeting, there were 10 creditors, out of which 6 favoured the proposed resolution plan. The remaining 4, even if their voting share is enough to block the plan in the CoC, are bound by the majority’s wishes to vote in favour of the plan.

VII. CONCLUSION

The evolving jurisprudence on creditor rights in India’s insolvency framework reflects a struggle to balance contractual sanctity with the imperatives of resolution. The Ruchi Soya approach, which ensures that dissenting secured creditors receive at least the value of their security interest, offers a more predictable and investor-friendly framework that aligns with global practices. This perspective preserves the economic rationale behind secured lending and reinforces market confidence by maintaining the integrity of contractual arrangements.

Considering global standards universally uphold the right to the value of a security interest, India must align with this approach. As an emerging market actively seeking foreign institutional and direct investment and ensuring credit availability, India cannot afford to stray from international best practices. Failing to do so could create uncertainty among creditors and investors, discouraging them from engaging in the Indian market. By adhering to established global norms, India can foster a more predictable and investor-friendly environment, thereby enhancing its appeal as a reliable destination for investment and lending.

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* The authors are third year students at the National University of Advanced Legal Studies, Kochi. They would like to thank Mr. Om Prakash, Manager at the Insolvency and Bankruptcy Board of India, whose guidance and insights during the first author’s internship under his supervision at the IBBI inspired the writing of this piece. The opinions expressed in this article are solely those of the authors and do not reflect the views of any other individual or organization.

[1] In re Bryant 439 B.R. 724 (Bankr. E.D. Ark. 2010) [20].

[2] In re San Felipe @ Voss, Ltd. 115 B.R. 526 (S.D. Tex. 1990) [6].

[3] Matter of Sun Country Dev. Inc. 764 F.2d 406 (5th Cir. 1985), [4]