Dissenting Financial Creditors and Equitable Principle under IBC-By Vandana Bansal

By Vandana Bansal, LLM
National Law University, Delhi

Dissenting Financial Creditors and Equitable Principle under IBC


Insolvency and Bankruptcy Code is one of the unique invention legislature of this country has given to the Corporate World. This code has not only provided with the balanced exit plan for the companies but has taken a step back and looked at the bigger picture by generating an era of rescue rather than liquidation. The long title itself made it clear that the primary object this code is to ensure the “time bound resolution of corporate person, promote entrepreneurship through availability of credit and to balance interest of all the stakeholders”.Other unique feature of the code which our nation has witnessed is classification of Financial and Operational Creditors (hereinafter FC and OC) into the code itself. The code define financial creditors as “person to whom financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to[1]” and financial debt means “debt along with interest, which is disbursed against the consideration for time value of money[2]”. On the other hand operational creditors means “a person to whom an operational debt is owed and includes person to whom such debt has been legally assigned or transferred[3]” and operational debt means “claim in respect of the provision of goods and services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the central government, any state government or any local authority[4]”.Both these class of creditors has been given equal rights and opportunities to file an application to begin the Corporate Insolvency Resolution Process (hereinafter CIRP) in the event of default by the Corporate Debtors (hereinafter CD) and has got equitable footing in term of repayment of their dues. Thus, equitability principle has been the intention of the code but scarcity of precedent and newness of the this law created utmost chaos and confusion to treat stakeholders equitably through out the resolution process of debtors.

Theoretically, the equitable treatment between creditors can be easily defined but when it comes to practical application of laws it is quite twisted than it seems and need to answer several questions. For instance, are all the financial creditors whether it is secured or unsecured should be treated at par? Are all the creditors shall be treated the same disregarding the nature of debt? Can FC and OC be discriminated relying on their completely different nature of debt owed to CD?shall all the creditors participating in committee of creditors(COC) shall be treated equal, no matter they have supported the resolution plan or not?These questions has been time and again answered by the legislation, tribunals, apex courts etc.This article therefore intend to analyse the present status of ‘dissenting creditors under COC and equitable principle in terms of payment of liquidation amount to creditors’ compiling the legislations and various amendments and decided case laws:


Inception of Dispute

Within one working years of the Code the dispute arose witnessing the discriminatory and arbitrary treatment within and outside the same classes of creditors.The matter came in-front of eyes of court and then eventually to the legislature through corporate insolvency resolution, initiated against ‘Binani Cement Limited’ subsidiary of ‘Binani Industries limited’ in year 2017 at Kolkata National Company law Tribunal(NCLT). As soon as the application has been accepted, on 13th October 2017 advertisement was made inviting competent lenders, investors and other persons to provide their ‘resolution plan’ for the consideration of COC. On 14th march 2018, COC accepted the resolution plan proposed by Rajputana Properties Pvt. Ltd.(Resolution Applicant) (RA). This led to emergence of fire of discrimination, firstly, because the financial creditors forming same class of creditors were treated differently in terms of repayment of their dues and Secondly, Operational Creditors were proposed to be paid less then half of their claim. The issue was heard at National Company Appellate Tribunal (NCLAT) (Delhi) where it was found out that although 99.43% of COC voted in favour of the plan, 10.53% were forced to vote in favour of plan only to save their sinking boat, as the plan clearly mentioned that dissenting creditors will be paid liquidation amount which was almost equal to NIL[5]. It was noted that almost all the FC namely ‘edelweiss Asset Reconstruction Company Limited’, ‘Bank of Baroda’, ‘Canara Bank’,’Bank of India’ and ‘State Bank of India’ were proposed to be Paid amount equivalent to what has been claim by them except two group i.e. Export-Import Bank of India and State Bank of India who were proposed to pay 72.59% and 10% respectively out of their total claim. The committee in the present case also overlooked the resolution plan by ‘Ultratech Cement Limited’ (Resolution Applicant after the Binani decision)who proposed to pay 100% claim of all the creditors be it FC or OC and also it was evident through the plan that they have intended to maximise the asset of corporate debtor by infusing extra working capital. Thus, NCLAT Delhi in Binani Industries Limited V. Bank of Baroda[6], held that differential treatment of the similarly situated creditors and other creditors like operational creditor by paying them liquidation value (lv) in the scenario of resolution is completely against the sacrosanct principle build through this code.  As held, “Any ‘Resolution Plan’ if shown to be discriminatory against one or other ‘Financial Creditors’ or the ‘Operational Creditors’, such plan can be held to be against the provision of the code and hence is illegal”.


Present Position of Dissenting Creditor in the Code

Can dissenting financial creditors be discriminated and can be made to be paid liquidated value against their claim? It is pertinent at this point to mention, the NCLAT views in Central Bank of India vs. Resolution Professional of the Sirpur Paper Mills Ltd & Ors.[7] where it was held that, provisions made by the Insolvency and Bankruptcy Board of India (Board) shall not countermand the intent of legislature provided through the provisions of the code. Present case found out that clause (b) and (c) of regulation 38(1), override the provisions of code, by making it mandatory for the dissenting financial creditors and operational creditors, to be given liquidation value, which in the maximum cases is equals to zero or very less compared to the resolution amount. Regulation 38(1)(b) and (c) of IBBI(Insolvency Resolution Process for Corporate Persons) Regulations, 2016, provides;

“38.Mandatory contents of the resolution plan.-(1)A resolution plan shall identify specific sources of funds that will use to pay the-

(b) liquidation value due to operational creditors and provide for such payment in priority to any financial creditors;

(c) 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”.

Meanwhile, Code nowhere intend to discriminate between assenting and dissenting voter at meeting of creditors. Thus, there were clear violation of section 240(1) of the code which says that the Board may make rules which shall be consistent with code. After the “Central Bank of India (Supra)” judgment, the board also take into consideration the discriminatory feature of regulation 38(1) clause (b) and (c) and hence made amendment/repealed, regulation 38(1) on 5th October, 2018 by completely removing provisions providing  “liquidation value due to dissenting Financial or Operational Creditor” in Resolution Plan on the other hand the same regulation i.e. 38 (1) (A) has also made it compulsory for the resolution plan to include a statement providing the record of interest of all stakeholder. However, having considered the dominant position of majoritarian creditors under COC and to protect the interest of OC an amendment was brought under section 30(2)(b) of the code which set a limit to compulsorily make the payments to OC in the manner provided by the code[8];

“(i) which shall not be less than the liquidation amount which such creditor was suppose to get under section 53 or

(ii) the amount that has to be paid to such creditors as per resolution plan in accordance with the order of priority in sub-section (1) of section 53,

whichever is higher and also set a threshold for the payment of Dissenting financial creditors, whereby they shall be paid in the manner provided by the board, which shall not be less than the liquidation amount which such creditors were to be paid under section 53 clause (1)”.

The code also very well cleared that distribution shall be made in “fair and equitable manner”, therefore dissenting creditors shall not be treated as a separate class altogether and have to be treated in the manner provided by the board subject to minimum limit set by the code. NCLAT, Delhi in Hero Fincorp Ltd v Rave Scans Pvt. Ltd and Others[9], where appellant being dissenting secured financial creditors was treated differently than other secured financial creditors in terms of his payment, held that;

“though section 30(2)(b)(ii) allows the differential treatment to the FC who do not voted in favour of plan, however, they have failed to notice that as per amended section ‘Resolution Applicant’ may treat the dissenting ‘Financial Creditors’, but such treatment can be given 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’”.The board does not provide any discrimination upon financial creditors on the ground of their dissenting status post the above mention 2019 amendment. Apex Court, in Committee of creditors of Essar Steel India Limited v. Satish Kumar Gupta 84(IBC)15/2019 [10] held that “equitable treatment is to be accorded to each creditor depending upon the class to which it belongs: secure or unsecured, financial or operational”. Therefore, although section 30(2)(b)(ii) provides for liquidation value to be given to dissenting financial creditors but that does not mean there shall be any discrimination between the dissenting and assenting creditors under similar class. The status of OC has also been discussed in Swiss Ribbon Pvt. Ltd v Union of India[11], by apex court, as;

“The NCLAT has, while looking into viability and feasibility of resolution plan that are approved by the committee of creditors, always gone into whether OC are given roughly the same treatment as FC, and if they are not, such plans are either rejected or modified” so that the operational creditors rights are safeguard to get equitable treatment as financial creditor.



If ultimately the creditors will get the liquidated value which in most of the cases is almost Nil would only discourage the creditors to lend and OC will start demanding the payment in advance which in most of the cases will be tough for the Corporate Debtors. Thus, this will only hamper the very purpose i.e. to maintain the continuity in the flow of credit in the economy. So, it must be critically analysed that though the code has provided a threshold of liquidation value to be paid to the operational and financial creditors but that limit is the minimum limit that has to compulsorily paid to the creditors and does not in any manner provide the maximum amount to the creditors.



[1] Section 5(7), Insolvency and Bankruptcy Code, 2016.

[2] Section 5(8), Insolvency and Bankruptcy Code, 2016.

[3] Section 5(20), Insolvency and Bankruptcy Code, 2016.

[4] Section 5(21), Insolvency and Bankruptcy Code,2016.

[5] Regulation 38(c), Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations,2016.

[6] Binani Industries Limited V. Bank of Baroda.

[7] Company Appeal(AT)(Insolvency) No. 526 OF 2018.

[8] Section 6, Insolvency and Bankruptcy (amendment) Act, 2019, https://www.ibbi.gov.in/uploads/legalframwork/630af836c9fbbed047c42dbdfd2aca13.pdf.

[9] Hero Fincorp Ltd v Rave Scans Pvt. Ltd and Others.

[10] https://ibclaw.in/committee-of-creditors-of-essar-steel-india-limited-through-authorised-signatory-vs-satish-kumar-gupta-ors-sc/

[11] Swiss Ribbon Pvt. Ltd v Union of India



The Opinions expressed in this article are that of the author(s).The facts and opinions expressed here do not reflect the views of http://www.ibclaw.in.

The opinions expressed herein are those of the contributors (which shall, for these purposes, include guests) in their personal capacity and do not, in any way or manner, reflect the views of the organizations that the contributors are presently associated with, or that have previously employed or retained the contributors. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.

Leave a Reply

Your email address will not be published. Required fields are marked *