Paridhi Finvest: Unsettling Certainty for Dissenting Financial Creditors

The Supreme Court’s ruling in Paridhi Finvest Pvt. Ltd. v. Value Infracon Buyers Association (‘Paridhi’)[i] was anticipated as a clarifying moment in the interpretation of dissenting financial creditors’ (‘DFC’) entitlements under the Insolvency and Bankruptcy Code (‘IBC’). Instead, the judgment has added to the prevailing uncertainty. By summarily dismissing the appeal without addressing prior conflicting views, the Court has effectively endorsed the controversial reasoning of Amit Metaliks,[ii] unsettling stakeholders who rely on predictability in insolvency outcomes.

This article examines the area of law that Paridhi has thrown into disarray: the statutory entitlement of DFCs under Section 30(2)(b) of the IBC.[iii] It unpacks the legislative provisions, walks through the precedents, evaluates the commercial consequences of the current state of law, and argues for the need for legislative clarity.

Statutory Protection for Dissenting Financial Creditors

A resolution plan under the IBC aims to reorganize the debtor’s liabilities and is binding on all stakeholders once approved by 66% of the Committee of Creditors (‘CoC’).[iv] To balance this majoritarian framework, the IBC offers protection to DFCs through two mechanisms. First, Section 30(2)(b)[v] mandates that dissenting secured creditors receive at least as much as they would under a liquidation scenario governed by Section 53(1).[vi] Second, Regulation 38(1) of the Corporate Insolvency Resolution Process (‘CIRP’) Regulations ensures preferential treatment to DFCs over other financial creditors.[vii]

On its face, this appears to offer meaningful protection. A creditor who dissents from the plan should still receive a minimum value reflective of their position in the liquidation waterfall. However, judicial interpretation has complicated this seemingly straightforward protection. This minimum payout mechanism is essential in safeguarding the rights of those creditors who, despite holding valid and enforceable security interests, choose not to support the resolution plan for any number of commercial or legal reasons. It is not merely a procedural formality but a substantive right to ensure that dissent does not result in a punitive outcome.

This intent to provide a balance between collective decision-making and individual creditor protection aligns with international best practices. In several jurisdictions, including the United States and United Kingdom, dissenting creditors especially those with secured claims are afforded special consideration to ensure that the principle of equitable treatment does not translate into majoritarian coercion.

From Essar to Paridhi: The Shifting Judicial Terrain

The uncertainty began with the Supreme Court’s decision in Essar Steel,[viii] which emphasized the primacy of CoC’s commercial wisdom, while simultaneously affirming the importance of statutory minimum entitlements for DFCs. This duality set the stage for divergent interpretations in subsequent rulings. The judgment carefully maintained the balance between respecting commercial decisions and protecting fundamental entitlements.

In Jaypee Kensington,[ix] the Court emphasized that a DFC must either receive the liquidation value or be allowed to recover that value through enforcement of their security. The judgment used the phrase “extent of value receivable,” which was later taken out of context and misapplied.

Amit Metaliks[x] marked a turning point. It held that DFCs are entitled only to the portion of liquidation value allocated to their class by the CoC, dismissing the argument that they should receive value based on their specific collateral. The Court justified this on the basis that the IBC does not differentiate among financial creditors solely on the basis of security. It framed the minimum entitlement in collective, not individual, terms.

Ruchi Soya offered a counterpoint.[xi] The Court held that Section 30(2)(b) must be read to guarantee a DFC at least the value of its security up to the admitted claim. It criticized Amit Metaliks for misreading Jaypee and observed that the CoC cannot arbitrarily curtail a creditor’s entitlement. The ruling reaffirmed the sanctity of collateral and statutory rights under liquidation.

Then came Paridhi.[xii] A three-judge bench summarily dismissed the appeal, upholding the NCLAT order which followed Amit Metaliks,[xiii] and observed that the case did not involve any substantial question of law. In doing so, the Court validated Amit Metaliks[xiv] without addressing the inconsistencies with Ruchi Soya[xv] or the reference to a larger bench. This dismissal has cemented a problematic interpretation as the prevailing view.

The Paridhi judgment has, in effect, endorsed a minimalist approach to judicial scrutiny. By not engaging with substantive legal issues or constitutional questions of property and commercial rights, the ruling leaves a vacuum in interpretative authority that only further judicial or legislative clarification can address.

Practical Consequences and Commercial Uncertainty

The Paridhi judgement has significant consquences. By affirming that DFCs are entitled only to a CoC-determined share of the liquidation value for their class, the judgment reduces the negotiating power and commercial expectation of secured creditors. This has the following immediate consequences:

  1. Devaluation of Pre-Insolvency Bargains: Secured lenders make investment decisions based on the value and enforceability of their collateral. If dissenting from a plan results in a payout untethered from their security interest, this erodes the integrity of such bargains and undermines confidence in structured finance and asset-backed lending.
  2. Weakened Property Rights: The judgment effectively deprives lenders of rights over collateral, even when duly registered and disclosed. It undermines the legal sanctity of security interests during CIRP. This can negatively affect the extension of credit secured by Indian assets.
  3. Incentive to Vote Against Plans: If liquidation provides a better recovery based on enforcement rights, DFCs may have an incentive to vote against otherwise viable plans, increasing the risk of failed resolutions. This undermines the core objective of the IBC of resolution over liquidation.
  4. Market Implications: Debt distressed investors, particularly asset reconstruction companies and special situation funds, face valuation uncertainty. This affects pricing and participation in the secondary market for secured claims. It also increases transaction costs and leads to more conservative valuations.

The resulting imbalance effectively allows assenting creditors to bind dissenters to receiving amounts potentially lower than their statutory minimum. While collective decision-making is necessary, it should not come at the expense of statutory protections.

Moreover, the Paridhi approach creates a strategic asymmetry in the resolution process. A small number of creditors are effectively able to dictate the distribution matrix, while those who dissent are left with limited legal protection.

Interpreting Jaypee and Section 53: A Missed Opportunity

The confusion stems in large part from the misreading of Jaypee Kensington.[xvi] The term “extent of value receivable” was meant to refer to the admitted claim, not the value assigned by the CoC. The logic is simple: a creditor cannot receive more than the claim amount, even if the collateral is worth more; but they must receive at least that value if their collateral supports it.

Section 30(2)(b) ensures DFCs are paid no less than what they would have received under Section 53 of the IBC.[xvii] This does not mean the value as determined by CoC, but rather the statutory priority their security holds in liquidation. Section 53 operates on two principles: (i) a creditor who relinquishes their security joins the common pool of secured creditors, and (ii) a creditor who retains their security realizes it independently.[xviii]

However, the CIRP framework does not permit the enforcement of security interests. Unless a resolution plan replicates liquidation entitlements, DFCs have no alternative. This tension remains unresolved in the absence of an explicit CIRP equivalent to Section 52.[xix] The Courts have read this gap in favor of majoritarianism, to the detriment of secured dissenters.

Jurisdictions like the U.S., U.K., and Singapore offer clearer recognition of secured creditors’ rights. Their laws reflect the principle that dissenters should recover up to the value of their security, within the limits of their claim. In the United States, Section 506 of the Bankruptcy Code ensures that secured creditors retain their lien unless explicitly modified,[xx] and Sections 1129(a)(7) and (b) provide for a “crams down” test that respects their entitlement to collateral value.[xxi] Similarly, under the UK Companies Act, Section 901G ensures that creditors receive at least the amount they would in liquidation.[xxii]

These international examples show that protection of secured dissenters is not only legally sound but also essential to foster a stable credit market. The lack of equivalent protection in India risks making secured lending and asset financing more fragile and exposed to the vagaries of creditor committees.

The Case for Legislative Intervention

The way jurisprudence is evolving makes one thing clear: it’s hard to reconcile competing interests through judicial interpretation alone. When the Supreme Court is asked to rule on matters that straddle both law and economic policy, it must proceed with caution. The issue of DFC entitlements is a perfect example it isn’t just a legal puzzle; it’s also a question of commercial design.

While referring the matter to a larger bench might help iron out legal inconsistencies, it won’t fix the deeper policy-level gaps. What’s really needed is a legislative amendment. Other countries have shown how clear statutory language can bring much-needed certainty to insolvency regimes. India could benefit from doing the same.

With stronger legislative guidance, resolution applicants, lenders, and the CoC would be able to structure plans more confidently. It would also cut down on the kind of litigation and delays that arise today because of unclear rules on entitlements and distributions. For now, though, the insolvency ecosystem is left grappling with a troubling paradox created by Paridhi: a protection that was meant to shield dissenting creditors now seems to leave them more vulnerable. Courts can only go so far. Judicial rulings can interpret the law, but they can’t rewrite the creditor hierarchy embedded in it. That job rests squarely with the legislature.

Ultimately, the Paridhi judgment should serve as a wake-up call for both stakeholders and lawmakers. It’s time to rethink how creditor rights are structured under the IBC. Without firm legislative intervention, the system will remain stuck between two difficult goals: protecting creditors and achieving timely resolutions. And right now, it’s not doing either very well.

References:

[i] Paridhi Finvest Pvt Ltd v Value Infracon Buyers Association and Anr Civil Appeal (Diary) No 14065 of 2024.
[ii] India Resurgence ARC Private Ltd v. Amit Metaliks Ltd 2021 SCC OnLine SC 409.
[iii] Insolvency and Bankruptcy Code 2016, s 30(2)(b).
[iv] Insolvency and Bankruptcy Code 2016, s 30(4).
[v] Insolvency and Bankruptcy Code 2016, s 30(2)(b).
[vi] Insolvency and Bankruptcy Code 2016, s 53(1).
[vii] Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016, reg 38(1).
[viii] Committee of Creditors of Essar Steel India Ltd v Satish Kumar Gupta [2019] SCC OnLine SC 1478 (SC).
[ix] Jaypee Kensington Boulevard Apartments Welfare Association v NBCC (India) Ltd [2022] 1 SCC 401.
[x] India Resurgence ARC Private Ltd v. Amit Metaliks Ltd 2021 SCC OnLine SC 409.
[xi] DBS Bank Limited Singapore v Ruchi Soya Industries Limited and Another [2024] SCC OnLine SC 3.
[xii] Paridhi Finvest Pvt Ltd v Value Infracon Buyers Association and Anr Civil Appeal (Diary) No 14065 of 2024.
[xiii] India Resurgence ARC Private Ltd v. Amit Metaliks Ltd 2021 SCC OnLine SC 409.
[xiv] India Resurgence ARC Private Ltd v. Amit Metaliks Ltd 2021 SCC OnLine SC 409.
[xv] DBS Bank Limited Singapore v Ruchi Soya Industries Limited and Another [2024] SCC OnLine SC 3.
[xvi] Jaypee Kensington Boulevard Apartments Welfare Association v NBCC (India) Ltd [2022] 1 SCC 401.
[xvii] Insolvency and Bankruptcy Code 2016, s 30(2)(b).; Insolvency and Bankruptcy Code 2016, s 53
[xviii] Insolvency and Bankruptcy Code 2016, s 53
[xix] Insolvency and Bankruptcy Code 2016, s 52
[xx] US Bankruptcy Code, 11 USC § 506.
[xxi] US Bankruptcy Code, 11 USC §§ 1129(a)(7), 1129(b).
[xxii] UK Companies Act S 901G.

Jai Kumar Bohara, is a 2nd Year Student at National Law School of India University (NLSIU).