BY LIPI AGARWAL, FOURTH- YEAR STUDENT AT NLSIU, BANGALORE
Introduction
Under the Insolvency and Bankruptcy Code, 2016 (No. 31 of 2016) (‘IBC’), an unsettled jurisprudential conflict has emerged, through India Resurgence and DBS Bank around a narrow question: does section 30(2)(b) entitle a dissenting secured creditor to the value of its security or only to the liquidation value under section 53 waterfall mechanism? The larger bench reference (hearing pending) and the Insolvency and Bankruptcy Code (Amendment) Act, 2026 (No. 6 of 2026), both, attempt to reconcile this statutory ‘floor’. Dissenting financial creditors (‘DFCs’) are currently assured at least ‘the amount they would receive in liquidation under section 53’. With effect from 26 May 2026, the 2026 Amendment replaced this test, inserting new clause (ba) into section 30(2) with a ‘lower of’ formula: (i) what they would receive in liquidation, and (ii) what they would receive if the proceeds were distributed under section 53.
This paper argues that the above doctrinal focus misses the forest for the trees. Even if the Supreme Court (‘SC’) adopts the protective DBS Bank position for the pre-2026 backlog, or leaves the enacted ‘lower of’ formulation of section 30(2)(ba) in place, DFC protection under the IBC remains illusory in practice. The problem is not only what the floor is, but whether it functions at all. It shows this by highlighting three structural failures: firstly, decision-making failure where Committee of Creditors (‘CoC’) members voting under information asymmetry cannot ascertain dissent-driven adjustments. Secondly, a behavioural failure resulting in anomalous situations where the unsecured majority can approve plans that exploit the minority secured creditors. Lastly, a valuation method failure where in the undefined concept of ‘liquidation value’ itself collapses, such as for assets like user data. The paper therefore shows that these failures render the ‘lower of’ formula a band-aid on a structurally unsound regime.
- Failure 1 – Information Asymmetry and the ‘Assenting Creditor’s Trap’
Courts and tribunals have consistently held the CoC to be learned financial actors exercising ‘commercial wisdom’ with judicial interference rightly confined to a narrow legality review. However, this assumes that these creditors understand not only their own position under a proposed resolution plan but also how other creditors’ decisions will . This assumption is empirically and behaviourally fragile, as explained in this section.
The waterfall adjustment problem
Post-Essar Steel, (2020) 8 SCC 531, which entrenched the CoC’s exclusive commercial control over how resolution-plan proceeds are allocated among creditor classes, resolution plans increasingly contain ‘adjustment clauses’, wherein if DFCs must receive at least their liquidation value under section 30(2)(ba), any shortfall between the plan amount and liquidation value is funded by reducing the share of assenting financial creditors (‘AFCs’) in that class. This balances the dissenters’ statutory floor and the debtor’s aggregate amount.
This is more than just a hypothetical risk. Recently, in August 2026, the NCLT (Mumbai Bench) found that the resolution plan for Reliance Communications Infrastructure Ltd could not be implemented as approved because the ₹318.67 crore required to fund priority payments to dissenting financial creditors exceeded the ₹301.72 crore actually available from the resolution professional and the successful resolution applicant combined, an illustration of the funding gap described above. The stakes of any single miscalibrated vote are, moreover, large in aggregate: Insolvency and Bankruptcy Board of India’s (‘IBBI’) recent study of 947 resolved CIRPs found an average haircut of 67.89% against admitted claims, with only a 32.08% recovery rate overall.
Formally, an AFC should assent only if its expected payout under the plan is at least its liquidation value (‘LV’). However, the actual payout depends on factors such as how many creditors dissent and what their individual liquidation values are. An AFC may approve a plan believing it will receive a value X (above its own LV), but after dissent-triggered adjustments, it ends up with (X – Y), where Y is the cumulative top-up paid to DFCs from the AFC’s share. Ex ante, a fully informed rational creditor would factor this as part of their decision making, wherein they will ask, “if the entire class dissents, what is my worst-case payout? Does that still exceed my liquidation entitlement?” Only then can the CoC’s vote genuinely qualify as genuine ‘commercial wisdom’.
Why this is not realistic: bounded rationality and hidden LVs
In practice, the above ‘worst‑case’ assessment is rarely possible because CoC members do not have access to the full payout structure they are voting over. Resolution professionals typically disclose only (i) the aggregate liquidation value and (ii) each creditor’s own liquidation entitlement, while valuation reports and peer‑wise LVs are withheld on confidentiality grounds. Even when a secured/unsecured split is shared, the distribution within the secured class (who has what security, what their LV is, and how much shortfall must be funded if they dissent) remains opaque. Creditors thus operate under bounded rationality: limited time, partial information, and strategic opacity from others.
This presents a classic prisoner’s dilemma, even for the assenting financial creditors (see Douglas G Baird and Thomas H Jackson, ‘Bargaining after the Fall and the Contours of the Absolute Priority Rule’ (1988) 55 U Chi L Rev 738). Consider two large financial creditors in the same class, A and B, each with an LV of 90 and each is offered 100 under the resolution plan. A group of small DFCs in the same class receive less than LV under the plan, but on dissenting, they get the LV, adjusted pro rata (‘Y’) out of A and B’s shares. Here, A and B have two options.
| B: Cooperate (vote YES) | B: Defect (vote NO) | |
| A: Cooperate | Plan passes, and both get ≈ 100 if tail dissent is low | Plan fails if 66% not reached and both get 90 (LV) |
| A: Defect | Plan may pass and A (DFC) gets ≥ 90 while B bears Y and may fall < 90 | Plan fails, and both get 90 (LV) |
For A, defecting is safer if B cooperates, as then A secures ≥ 90 as a dissenter and avoids the risk of actual payout falling < 90 (as the assenter bears most of the top‑up cost Y). If B also defects, both get 90 in liquidation anyway. The same logic holds for B. Thus, under uncertainty about (a) how many tail creditors will dissent, and (b) how the adjustment burden will fall, the individually rational strategy for each is to defect (to avoid the sole burden of everyone’s top‑up cost). Yet if both defect, the collectively efficient outcome is now just LV of 90, producing a collectively worse equilibrium. Thus, the combination of hidden liquidation values and strategic interdependence means that CoC decisions do not necessarily reflect true payoffs.
Implication: commercial wisdom without commercial data
This informational deficit undermines the ‘commercial wisdom’ doctrine by showing a voting outcome produced through guesswork rather than calibrated risk assessment. CoC voting outcomes can be driven by strategic fear (avoiding being the lone co‑operator) or optimism bias (over‑estimating plan payoffs), rather than by any coherent maximisation of collective value. This informational gap caused by the current legal framework incentivises AFCs to approve plans that under-compensate DFCs, because they underestimate their eventual payoff.
Any serious regime of DFC protection must therefore start with mandatory disclosure of individual liquidation entitlements and valuation assumptions to all CoC members, subject to appropriate confidentiality undertakings, before any vote. Without that, the statutory floor in section 30(2)(ba) is notionally binding but decision-theoretically meaningless.
- Second Failure: Incentives and Majority Expropriation of Security
If AFCs cannot accurately price their own downside, a numerically dominant majority can, deliberately or otherwise, approve resolution plans that breach pre‑insolvency security priorities without paying full compensation. This undermines the ex‑ante value of security by shifting it away from secured dissenters without an increase in total surplus.
Majoritarian control and creditor heterogeneity
The IBC applies a simple voting rule where a 66% vote by value of financial creditors binds all dissenters (section 30(4)), once the Adjudicating Authority is satisfied of compliance with section 30(2). The code does not require separate classes based on strength or nature of security, and thus, financial creditors usually vote as a single block. It does not factor in cases where, for instance, a large financial creditor is unsecured but constitutes more than 66% value, or a specialist creditor holding a first charge on specific assets but with say 20% value only, both creditors are lumped into a single voting class. The current protection scheme allows the majority to approve any inter-class distribution as long as the section 30 floor is met.
Once the majority understands that DFCs have a weak or low liquidation fallback (due to LV’s estimation difficulties, explained in Section III) and the courts will not interfere with intra-class allocations due to ‘commercial wisdom’ doctrine, the majority has a clear incentive to approve adverse plans. This includes plans that give the secured DFC only marginally more than its LV and instead divert the going-concern value of the collateral either to the majority itself (as an unsecured assenting creditor) or the bidder for the plan’s viability. Thus. pre‑insolvency security arrangements, carefully priced and documented in lending contracts, are thus effectively rewritten inside Corporate Insolvency Resolution Process (‘CIRP’) by a protected majority.
This majoritarian expropriation is an empirically demonstrated reality rather than a hypothetical behavioural assumption. Under the single-block voting structure of the IBC, a dominant majority is structurally incentivized to confine secured DFCs to a depressed liquidation baseline, allowing assenting creditors or resolution applicants to freely capture the going-concern surplus. This exploitation is evidenced by repeated practical outcomes, most prominently in India Resurgence ARC (P) Ltd v Amit Metaliks Ltd, where a dissenting secured creditor holding a ₹12 crore security interest against a ₹13.38 crore claim was forced to accept a payout of just ₹2.026 crore. In that dispute, the Supreme Court upheld the allocation of roughly one-sixth of the security’s actual value as a valid exercise of the CoC’s ‘commercial wisdom’, actively facilitating the diversion of secured value. Additionally, recent NCLAT rulings, including ICICI Bank Ltd v BKM Industries Ltd and HDFC Bank v Birla Tyres Ltd, expose a recurring pattern of majorities systematically allocating surpluses to themselves while weaponizing the statutory liquidation floor against dissenting secured lenders. The aggregate severity of these outcomes is further corroborated by the Insolvency and Bankruptcy Board of India’s (IBBI) recent study of 947 resolved Corporate Insolvency Resolution Processes (CIRPs), which reveals a systemic average haircut of 67.89% and an overall recovery rate of just 32.08%. Furthermore, a recent NCLT Mumbai decision regarding Reliance Communications Infrastructure Ltd showcased the mathematical impossibility caused by these obscured adjustment strategies, where the ₹318.67 crore needed to fund priority dissenting payments exceeded the ₹301.72 crore actually available from the resolution process. The stakes of any single miscalibrated vote are, moreover, large in aggregate: Insolvency and Bankruptcy Board of India’s (‘IBBI’) recent study of 947 resolved CIRPs found an average haircut of 67.89% against admitted claims, with only a 32.08% recovery rate overall.
The 2026 Amendment sharpens this incentive in one respect while narrowing it in another. It inserts an Explanation to section 53(1)(b)(ii) capping a creditor’s secured status at the realisable value of its security interest, treating any shortfall as an unsecured claim, and a further Explanation to section 3(31) confirming that a security interest exists only where created by an agreement or arrangement between parties, not merely by operation of law. Read together with the ‘lower of’ floor now in section 30(2)(ba), these clarifications give a numerically dominant majority a clearer statutory map of exactly how far a dissenter’s claim can be discounted before its secured status itself gives out.
More than mere redistribution
The IBC consciously permits departures from strict priority when they serve a collective purpose. Majority‑approved restructurings that preserve a viable business can justifiably bind dissenters if everyone is better off than in liquidation. However, the current situation differs.
As Krishna Infosolutions makes clear, DFCs are confined to their statutory minimum under section 30(2) even when surplus exists, as only assenting creditors have a claim on any surplus generated under the resolution plan, unless the plan itself grants more. A strongly secured creditor prices its loan on the assumption that, in distress, it would have priority over the value of its collateral. During CIRP, that collateral may have significant going‑concern value, but its liquidation value may be artificially low (Section III).
The majority can then use its voting power to keep the secured dissenter close to this depressed floor, while sharing the upside only among assenting creditors. Instead of being a compromise necessary to rescue the debtor, it is the majority free‑riding on another creditor’s collateral. Rational secured lenders will respond by pricing this risk into future lending (through higher interest rates, demands for over‑collateralisation, or withdrawal from certain borrower segments, etc), making secured credit more expensive and less available without any clear evidence that overall resolution outcomes improve. The current framework thus permits a form of inefficient expropriation of security wherein it does not enlarge the pie but simply reallocates slices and weakens the secured‑credit market. Since the IBC aims to foster credit availability and lower the cost of capital, any amendment must address that section 30(2)(ba)’s liquidation‑value floor is insufficient to protect secured DFCs.
Lack of Substantive Checks on the majority expropriation
Other insolvency regimes, such as the US and the UK, illustrate potential ways to regulate such majoritarian expropriation. Under US Chapter 11 (11 USC section 1129(b)), class-based voting and the ‘fair and equitable’ cramdown standard require that a dissenting secured class receive either the present value of its collateral or retain its lien with an appropriate payment stream, while unsecured classes cannot simply vote to divert secured value to themselves. Under UK Part 26A (Companies Act 2006, ss 901A, 901G), the ‘no worse off in the relevant alternative’ test requires courts to compare a dissenting class’s treatment under the plan with subjective and realistic counterfactuals (for instance, going-concern sale, administration, etc.), not just formal/illusory liquidation value.
The Indian framework has no equivalent substantive test. Courts treat the allocation of the going‑concern surplus as sacrosanct commercial wisdom (K Sashidhar v Indian Overseas Bank (2019) 12 SCC 150; Essar Steel (2020) 8 SCC 531. In a setting already characterised by information asymmetry and an unstable liquidation benchmark, this creates a structural bias against numerically small but strongly secured creditors. Without some combination of class‑based voting that groups genuinely similarly situated creditors, a limited ‘no worse off’ or ‘fair and equitable’ review for dissenting secured creditors, and improved information flows on liquidation entitlements and valuation assumptions, the IBC’s current regime does not merely ‘rebalance’ bargaining power, it systematically facilitates inefficient, value‑destroying breaches of security under the cover of commercial wisdom.
These comparators are apt rather than aspirational: like the IBC, both regimes bind dissenting creditors by majority vote rather than unanimous consent, so the reform is a substantive check added onto a voting structure India already shares, not an alien import. A wholesale transplant would nonetheless face real friction. However, because Indian tribunals (NCLTs) grapple with acute case backlogs and cannot readily host extensive, US-style valuation contests for every dissenting claim, a wholesale transplant is unworkable. Resolving the statutory failure therefore requires a tailored documentary check for the IBC: a requirement proving that specified valuation methodologies were adhered to, and confirming that the dissenter’s payout meets a stated fraction of the going-concern surplus, thereby bridging the gap between India’s uncritical ‘commercial wisdom’ doctrine and the substantive protections of the US and UK.
- Third Failure: The Indeterminate Concept of Liquidation Value
Another structural flaw in the current dissenting-creditor regime lies not in who is entitled to liquidation value, but in what ‘liquidation value’ represents. section 30(2)(b)(ii) (as originally inserted in 2019, now renumbered section 30(2)(ba)) and the 2019 amendment treat liquidation value as if it were a precise, objective benchmark. Yet ‘liquidation value’ under the IBC is a constructed estimate with significant variance, not a fixed quantity.
The illusion of precision: valuation as a range, not a number
Under the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, Reg. 35 (‘CIRP Regulations’), liquidation value is determined by registered valuers using ‘internationally accepted valuation standards’, and where two valuations diverge materially, a third valuer may be appointed, and an average of the closest estimates is taken. IBBI’s own guidance on valuation expressly acknowledges that different methods (discounted cash flow, market multiples, asset-based approaches) can produce materially different results, information availability and market depth heavily influence outcomes, and valuation is necessarily a matter of professional judgement rather than mechanical calculation.
Tribunal orders have emphasised that LV is to be treated as a band or range, not a rigid point figure. In some cases, tribunals have accepted third valuations or re-valuations, while in others, they have refused to intervene in the CoC’s commercial domain. In this setting, the statutory floor promised to the DFCs rests on a baseline that is less of an objective floor and more of a negotiated product.
Intangibles and digital businesses: when the floor approaches zero
The general problem becomes sharper in cases involving intangibles and digital-first businesses, where value is highly context and firm-specific, with legal constraints on transfer that minimise liquidation prices. For instance, in terms of personal data-heavy platforms, because the Digital Personal Data Protection Act, 2023 (‘DPDP Act’) restricts re-use and transfer of personal data to purposes for which consent was originally obtained, a liquidator may be significantly constrained in monetising user databases in a piecemeal liquidation sale. For a secured DFC whose security interest attaches to these digital assets, the ‘floor’ becomes illusory, and the majority CoC can allocate the entire data premium to favoured creditors, while still complying with section 30(2)(b). At the same time, a resolution applicant who acquires the business as a going concern can lawfully continue the data-driven model, subject to updated notices and consents, thereby realising substantial going-concern value.
A statutory floor built on sand
Thus, the IBC remains anchored to a liquidation metric that has ceased to be meaningful in large parts of the modern economy. Where the law thinks it is guaranteeing a non-zero entitlement, the binding floor is practically nil. When combined with the information asymmetries described in Failure 1, creditors are thus asked to make strategic voting decisions around a benchmark that is itself unstable and opaque.
Therefore, the problem with the current law is not only the disagreements over how to compute LV by reference to security value (DBS Bank) or class-wise pari passu shares (India Resurgence), but that LV itself is an indeterminate and sometimes distorted anchor. DFC’s rights are thus subject to ‘not less than whatever two or three valuers, chosen under opaque conditions, happen to say’, which is a tenuous foundation for a supposedly hard statutory right.
Conclusion
The current debate over whether dissenting secured creditors are entitled to ‘security value’ (DBS Bank) or only ‘liquidation value’ (India Resurgence), and the now enacted ‘lower of’ formula, suggests these to be the primary solutions. Even under a maximally protective reading of section 30(2)(ba) in favour of DFCs, three deeper failures (the assenting creditor’s dilemma, the majority’s incentives to expropriate secured value, and the indeterminacy of liquidation value) render the statutory floor practically fragile. The law’s promise that dissenters will receive ‘not less than liquidation value’ risks becoming a formal shell.
The way forward requires more than just reading section 30(2)(ba) broadly. At a minimum, it must (i) mandate disclosure of individual liquidation entitlements and core valuation assumptions to all CoC members, (ii) introduce class‑based voting that reflects material differences in security and risk, and (iii) empower adjudicating authorities to apply a narrow ‘no worse off in the realistic alternative’ or ‘fair and equitable’ test to dissenting secured creditors, along the lines UK and US standards. Without these, the combined effect of information asymmetry, a weak liquidation value analysis and unrestrained majority influence will continue to make DFC’s rights more phantom than protection.
Leave a Reply