Ruchi Soya’s Insolvency: Singapore’s DBS Bank Approaches Supreme Court Against Creditors’ Committee

The manner of distribution of claims between financial creditors has reached the Supreme Court yet again. This time in Ruchi Soya’s insolvency where Patanjali Ayurveda has emerged as the successful bidder. Patanjali’s proposal of paying Rs 4,134 crore to the financial creditors, against the admitted claim of Rs 8,398 crore, was approved by the creditors’ committee with 96.9 percent vote share. The plan was approved by the National Company Law Appellate Tribunal on Nov. 18.

DBS Bank Ltd. had voted against Patanjali’s resolution plan and has now appealed against NCLAT’s decision of allowing distribution of the bid amount without taking into account the value of security held by secured creditors.

DBS Bank Vs Creditors’ Committee

DBS Bank had lent Rs 242 crore to Ruchi Soya and had a sole first charge over some of the fixed assets of the company. If DBS were to enforce its security, it would recover 90 percent of its exposure to Ruchi Soya, it had argued before NCLAT. And so, it asked the creditors’ committee to distribute the bid amount based on the value of security. But the CoC rejected DBS’ submission and allocated the amount between the secured financial creditors at the same rate.

And so, DBS voted against the resolution plan and became a dissenting financial creditor. It argued before NCLAT that:

• As a dissenting financial creditor, DBS is entitled to a minimum amount as payable in the event of Ruchi Soya’s liquidation, which will be close to 90 percent of its exposure. The distribution approved by the CoC gives it a 49 percent recovery - on a par with all secured creditors irrespective of their security value.
• Section 30 of IBC, amended in August this year, says financial creditors who vote against the resolution plan must at least get the amount they would’ve got in the event of liquidation of the insolvent company.
• The amended section also says that the priority and value of the security interest of the secured creditors must be taken into account while determining distribution.

Outcome At NCLAT

The appellate tribunal dismissed DBS Bank’s arguments on the following grounds:

• Section 30 was amended effective Aug. 16 prospectively. Since the creditors’ committee had approved the distribution prior to that, the section doesn’t bind them. Also, the section was amended to ensure that dissenting financial creditors get at least a minimum value and not maximum of the secured assets.
• The distribution under the section that specifies creditor hierarchy in the event of liquidation does not distinguish between similarly situated secured creditors.
• Financial creditors, including secured creditors, cannot dissent merely to claim preference on grounds of a higher payout in spite of the plan being feasible, viable.

DBS Bank Knocks At Supreme Court’s Door

Aggrieved by NCLAT’s decision, DBS Bank has now approached the apex court. It is argued that the appellate tribunal’s decision failed to appreciate the rights of secured creditors based on the value of security and has ignored the applicability of the amended Section 30, and the Supreme Court’s verdict in Essar Steel case. BloombergQuint has reviewed a copy of DBS Bank’s petition.

It has pointed out that the approved resolution plan gives all financial creditors 49.22 percent of the total admitted claims. Based on the pro-rate distribution approved by the CoC, DBS would receive Rs 119 crore, as against its total claim of Rs 243 crore.

But since DBS Bank has a secured, sole first charge over defined assets of Ruchi Soya, and its security structure is superior compared to other financial creditors, it ought to be treated differently. If the CoC’s approach is upheld, it would impact credit market as a whole. If banks cannot secure their interests in case a corporate debtor become insolvent, the availability of credit will decline, DBS Bank has stated. The CoC has wrongfully taken shelter under the principle of commercial wisdom of creditors, the petition has noted.

The NCLAT’s decision penalises DBS Bank which had negotiated high value security and has rewarded imprudent lenders who had accepted low-quality security, DBS Bank’s petition has said.

The case will come up for hearing before the Supreme Court on Friday.