The Problem That Wasn't Really Fixed: Entitlement of Dissenting Financial Creditors under Proposed IBC Amendments 2025

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. The proposed section reads as follows:

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. Bank A lent Rs. 100 crores and has the first charge over assets worth Rs. 80 crores. Bank B also lent Rs. 100 crores, but only has a second charge on the same assets, with value of security interest capped at Rs. 60 crores. Bank C lent Rs. 300 crores without taking any security. A resolution plan proposes Rs. 200 crores in total for all financial creditors, and Bank A finds the deal unacceptable.

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. Bank B would receive Rs. 60 crores from the remaining security in the same manner. Bank C would obtain whatever is left for unsecured creditors.

In the second calculation, you take the Rs. 200 crores from the resolution plan and distribute it according to liquidation priorities. Bank A receives Rs. 80 crores due to its first charge, while Bank B obtains Rs. 60 crores from the second charge. The rest goes to Bank C and other unsecured creditors.

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 prompts an uncomfortable question: what is this new formula meant to achieve? If Bank A were supposed to receive only Rs. 40 crores in the second calculation (based on pro-rata distribution), then the "lower of" test would yield only Rs. 40 crores, which might deter dissent. But that is not what Section 53(1) states.

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. The drafters clearly intended for these calculations to produce different outcomes; otherwise, why create the "lower of" test? However, the amendment does not clarify when or why the numbers might differ.

When the Formula Might Actually Work

Here's another scenario that might clarify the drafters' intention. Suppose Bank A possesses exclusive charge on assets valued at Rs. 100 crores but holds only 20% of the voting share in a Committee of Creditors. The resolution plan offers Rs. 150 crores total to all financial creditors. Under clause (i), Bank A would get Rs. 100 crores based on its exclusive security. If clause (ii) is meant to enable pro-rata distribution without considering security interests, Bank A might only receive Rs. 30 crores (20% of Rs. 150 crores based on voting share), making the "lower of" test result in just Rs. 30 crores instead of Rs. 100 crores. This scenario would encourage Bank A not to dissent. However, Section 53(1) does not require pro-rata distribution; it still acknowledges security priorities, suggesting Bank A would likely get Rs. 100 crores in both scenarios.

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 for all creditors. Under clause (i), Bank A could recover its full debt by enforcing its security in liquidation. Under clause (ii), Bank A would be limited to its portion of the Rs. 100 crores resolution total, possibly receiving Rs. 80-90 crores after accounting for CIRP costs and other priorities. In this case, the "lower of" test would indeed matter, providing Bank A with the smaller amount and likely discouraging dissent when resolution plans offer less than what secured creditors could retrieve through liquidation. Nonetheless, such scenarios are infrequent, leaving many practitioners unsure about the drafters' actual intent.

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. Illustration II in Section 53(2) now clarifies that if Bank A has a first charge and Bank B has a second charge on the same asset, Bank A will be paid first. This may seem obvious, but it is surprising how much court time has been consumed arguing whether such arrangements should be respected.

This clarification is genuinely transformative. Ongoing litigation under the current system has largely revolved around whether liquidation value calculations should honour security priorities or treat all secured creditors as equal on a pro-rata basis. Committees of Creditors have made inconsistent decisions on this point, leading to disputes from dissenting creditors who felt their security was overlooked. Now, banks can negotiate security arrangements with the assurance that those contracts will be honoured in insolvency, thus eliminating the uncertainty that has characterised the current system.

The amendment also resolves another issue that has caused confusion. If you're owed Rs. 100 crores but your security is worth only Rs. 60 crores, you're considered a secured creditor for Rs. 60 crores and an unsecured creditor for the remaining Rs. 40 crores. This seems logical, yet legal clarity on obvious points can take longer than expected.

What This Means for Different Stakeholders

The new "lower of" formula for dissenting creditors might turn out to be less significant if both calculations usually produce the same outcome. Courts will eventually need to determine what the drafters really intended and whether there are situations where the calculations differ meaningfully.

Meanwhile, the security priority clarifications are genuinely helpful and should reduce the kinds of disputes that have been overwhelming NCLATs. Lenders can structure their deals with greater assurance that their security arrangements will be respected.

Resolution professionals and lawyers should brace for new rounds of litigation as everyone attempts to clarify the practical implications of the "lower of" test. Cases involving operational creditors may provide some guidance, but financial creditors function in a different realm with distinct rules.

Looking Ahead

The broader landscape here reflects a legal system still establishing itself. India's insolvency law is barely eight years old, and amendments like this indicate it is still evolving. Some changes, such as the clarifications about security priority, represent true advancements based on real-world experience. Others, like the dissenting creditor formula, may introduce new challenges while addressing old ones.

The amendment captures the ongoing difficulty of balancing competing interests: promoting the success of resolution plans while protecting individual creditor rights, respecting group decision-making while avoiding majority control, and ensuring legal certainty while allowing for commercial flexibility.

Whether this specific amendment properly strikes that balance remains to be determined. What is clear is that the insolvency ecosystem will spend months grappling with these changes, testing the new rules against real-world situations and likely generating additional amendments in the process.

For now, the industry receives some useful clarifications on security interests alongside a puzzling new formula that might, or might not, achieve its intended goal. In the broader context of developing a mature insolvency system, that is probably a favourable outcome, even if it leaves everyone wondering what the drafters were truly thinking.

This is the second article in our comprehensive series analysing key issues in the IBC Amendment Bill, 2025. We'll be examining each major provision and its practical implications for insolvency practitioners and other stakeholders. You can read oru first article on CCI Approval here.

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