The Government’s latest attempt to address the Insolvency and Bankruptcy Code presents an intriguing challenge.
The 2025 Amendment Bill aims to establish a clear formula for what dissenting financial creditors should receive. However, it may end up creating a solution that does not solve anything at all.
The current rule is fairly straightforward. If you are a financial creditor who does not approve a resolution plan, you are entitled to at least what you would receive if the company were liquidated. This makes sense. Why would anyone agree to a resolution that leaves them worse off than if the company were liquidated, allowing them to sell the assets tied to their security interest?
However, the definition of liquidation value has been controversial. Section 53(1) does not reference the priority among lenders, which has led to one perspective suggesting that all secured creditors will rank equally in liquidation value, calculated on a pro-rata basis according to their voting share in the CoC. Others argue that priority among creditors should be recognised, a view supported by the Insolvency Law Committee.
What the Courts Have Been Saying
The entitlement of dissenting creditors has been tested in courts multiple times. In the case of India Resurgence ARC v. Amit Metaliks, the Supreme Court clarified that dissenting creditors must receive their liquidation value as a minimum. The court allowed the Committee of Creditors to exercise their judgment in determining how to distribute funds.
In another case involving Jaypee Kensington Boulevard Apartments Welfare Association & Ors vs. NBCC (India) Ltd. & Ors, the Supreme Court reinforced the idea that dissenting financial creditors should receive liquidation value. Decisions from the NCLAT, such as in SIDBI v. Vivek Raheja, have maintained this balance between protecting individual creditors and honouring collective decision-making.
More recent cases, like HDFC Bank v. Pratim Bayal, continue to shape this framework, although a larger Supreme Court bench is still addressing some of these matters in the DBS Bank case.
The Government’s New “Solution”
The 2025 amendment seems to offer a clever fix. Instead of merely guaranteeing liquidation value, the new rule states that dissenting creditors should receive the “lower of” two amounts. First, what they would receive in actual liquidation. Second, what they would receive if the resolution amount were distributed following the same priority rules as liquidation.
30. Submission of resolution plan.
(2) The resolution professional shall examine each resolution plan received by him to confirm that each resolution plan
(ba) provides for the payment of debts of the financial creditors, who do not vote in favour of the resolution plan, in such manner as may be specified, which shall not be less than the lower of the amount––
(i) to be paid to such creditors in the event of a liquidation of the corporate debtor under section 53; or
(ii) 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, as the case may be.
Here is where things become confusing. The amendment refers to “Section 53” in the first scenario but to “sub-section (1) of Section 53” in the second. While this might seem like legal nit picking, the distinction could be significant.
Section 53 encompasses all aspects of asset distribution, including special rules for secured creditors. Sub-section (1) focuses solely on basic priority. The question is whether this difference carries any weight in practice.
This confusion has arisen from attempting to apply the formula used for operational creditors, where it works well because those creditors typically lack security interests. Financial creditors operate under different circumstances. They possess charges and guarantees that confer specific rights. Simply imitating a formula that functions for trade creditors may not translate effectively to secured lenders.
Working Through the Numbers
Let’s consider an example. Suppose a company owes Rs. 500 crores to its lenders…
In the first scenario, basis the liquidation value, Bank A would recover Rs. 80 crores from its security after covering insolvency costs and employee dues…
In the second calculation, you take the Rs. 200 crores from the resolution plan and distribute it according to liquidation priorities…
In this example, Bank A receives Rs. 80 crores in both scenarios. The “lower of” test results in Rs. 80 crores for Bank A…
This issue is not just academic. If both calculations usually yield the same result, the entire amendment becomes a complex legislative exercise without practical advantage…
When the Formula Might Actually Work
Here’s another scenario that might clarify the drafters’ intention…
One instance where calculations might differ meaningfully, though it is rare, is when Bank A has exclusive charge over assets valued at Rs. 200 crores, but the resolution plan offers only Rs. 100 crores total…
The Silver Lining: Security Priority Clarification
On a positive note, buried within this amendment is a small but crucial clarification that could resolve years of litigation…
This clarification is genuinely transformative…
The amendment also resolves another issue that has caused confusion…
What This Means for Different Stakeholders
The new “lower of” formula for dissenting creditors might turn out to be less significant…
Meanwhile, the security priority clarifications are genuinely helpful…
Resolution professionals and lawyers should brace for new rounds of litigation…
Looking Ahead
The broader landscape here reflects a legal system still establishing itself…
The amendment captures the ongoing difficulty of balancing competing interests…
Whether this specific amendment properly strikes that balance remains to be determined…
For now, the industry receives some useful clarifications on security interests alongside a puzzling new formula…
This is the second article in our comprehensive series analysing key issues in the IBC Amendment Bill, 2025.