The Creditor Conundrum: An Analysis of the Treatment of Dissenting Creditors during Insolvency Proceedings of Financial Institutions in India

This research paper explores the Indian legal framework including Insolvency and Bankruptcy Code (IBC) 2016, Companies Act 2013, Reserve Bank of India (RBI) Act, and associated regulations governing treatment of dissenting creditors in financial institution insolvencies. It highlights the critical distinctions in treatment between key creditor classes like financial vs. operational, secured vs. unsecured and across different types of companies including those limited by shares vs. those limited by guarantee.

The paper analyses the regulatory frameworks covering four categories of financial institutions, viz., Non-Banking Financial Companies (NBFCs), Fintech Entities, Public Financial Institutions, and Statutory Financial Institutions. NBFCs are governed under the ambit of RBI’s regulations and fall under the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (FSP Rules), with insolvency initiated solely by the regulators. Fintech entities, lacking dedicated legislation, are subject to RBI’s scale-based regulatory framework, with their digital asset structures posing unique challenges. Public and statutory financial institutions, such as SIDBI, are primarily governed by institution-specific statutes, though IBC provisions may apply during debt restructuring.

Furthermore, the paper delves into judicial contradictions concerning dissenting creditors, particularly the unresolved tension between allowing secured creditors to enforce security interests and prioritizing proportional recoveries. Judicial interpretation in cases like Jaypee Kensington Boulevard v. NBCC and India Resurgence ARC Private Limited v. Amit Metaliks Limited illustrates these ambiguities, with the pending DBS Bank v. Ruchi Soya Industries Ltd. case poised to clarify whether dissenting creditors can claim security value. Lastly, the paper draws a comparative analysis with best international practices, referenced to highlight lacunas.

Key regulatory gaps identified include asymmetric protections for operational creditors, inconsistent security rights, institutional fragmentation for fintechs, and limitations in cross-class cramdown tools. The paper concludes by advocating for reforms that integrate security value assessments into Section 30(2)(b) of the IBC, enhance operational creditor representation in the Committee of Creditors (CoC), and align FSP Rules with global best practices to foster a more equitable and efficient insolvency ecosystem in India.