1. What an ICA Actually Governs

An ICA is not a loan agreement. It is a contract between creditors governing:

• Priority of charge: Who is first charge, second charge, pari passu
• Standstill: No individual enforcement without consent
• Decision making: Voting threshold for restructuring, enforcement, release of security
• Waterfall: How proceeds are shared if security is sold
• Buyout / Drag rights: First charge lender can buy out second charge

In India there are 2 parallel regimes:

a) RBI Prudential Framework for Resolution of Stressed Assets - 7th June 2019

Signing of inter-creditor agreement [ICA] by all lenders to be mandatory, which will provide for a majority decision making criteria.
All lenders shall enter into an inter-creditor agreement [ICA], during the review period, to provide for ground rules for finalisation and implementation of the RP

Rule: 75% by value and 60% by number - if met, decision binds all lenders in ICA. If not implemented in 180 days, additional 20% provisioning.

b) IBC Regime: IBC does not automatically respect ICA. This is the conflict point.

2. How Failure to Align Happens - 5 Common Patterns

1. Unilateral Enforcement: Second charge lender files SARFAESI or Section 7 IBC without ICA consent, violating standstill.

2. Separate Settlement: One lender does one-time settlement (OTS) with borrower and releases its security, destroying waterfall for others.

3. Voting Defection: Lender signs ICA but then votes against approved Resolution Plan in CoC, or refuses to sign deed of release.

4. Priority Breach: First charge lender uses sale proceeds to adjust unsecured dues first, instead of sharing as per inter-se agreement.

5. Failure to Enter ICA: After default is reported, one lender refuses to sign ICA within 30-day review period, blocking RBI framework.

Legal consequence: Breach of ICA = breach of contract + loss of RBI regulatory forbearance + liable for damages to other lenders + plan can be rejected by NCLT.

3. Legal Position in India - Case Laws

A. Supreme Court on Inter-Creditor Disputes

1. Bank of India vs M/s Sri Nangli Rice Mills Pvt. Ltd. & Ors., (2025 INSC 765) - SC - 23 May 2025

disputes between secured inter-creditors must be resolved through arbitration or conciliation under Section 11 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
Supreme Court held that inter-creditor disputes [between secured creditors] must be resolved through arbitration under Section 11 of the Act

Ratio: You cannot go to DRT for priority fight. Mandatory statutory arbitration, even without written arbitration clause - deemed agreement. If you enforce security in violation of ICA, other creditor can drag you to arbitration.

2. ICICI Bank vs SIDCO Leathers Ltd. [Civil Appeal 2332 of 2006] - SC - 28 April 2006

The legal position vis-à-vis inter-se-priority of charges in the pre-IBC regime was discussed at length by the Hon’ble Supreme Court of India in the case of ICICI Bank vs Sidco Leathers Ltd.

Ratio: Supreme Court held Parliament cannot be presumed to have taken away right in property. First charge holder's priority must be respected even in liquidation. Foundation for arguing ICA priority should survive. Report of Insolvency Law Committee 26 March 2018 also noted that inter-creditor agreements should be respected.

B. NCLT / NCLAT - IBC vs ICA Clash

3. NCLT Hyderabad - PTC India Financial Services Ltd. v. Vikas Prakash Gupta & Ors. (2023) ibclaw.in 329 NCLT

NCLT recently rendered a verdict... which has rejected the recognition of the Inter-creditor agreement entered into by the parties prior to the commencement of the corporate insolvency resolution process [CIRP].

4. NCLT Hyderabad on Section 7 Filing:

Inter-Creditor Agreement For Coordinated Action Does Not Bar Insolvency Plea By Single Lender: NCLT Hyderabad
Inter-Creditor Agreement that has been entered between some of the consortium members, at no stretch of imagination, will come in the way of admission of the petition under Section 7 of IBC

Failure to align lesson: If ICA says "no lender will file IBC without 75% consent", that clause is unenforceable against Section 7. Single lender can still file. ICA cannot override IBC. This was also discussed in Amitabh Kumar Jha Vs Bank of India [2020] ibclaw.in 101 NCLAT.

5. Technology Development Board v. Mr. Anil Goel and Small Industries Development Bank of India v. Vivek Raheja - The Waterfall Controversy

IBC’s Failure in Considering Inter-se Priority Amongst Secured Creditors
the waterfall mechanism as envisaged under Section 53, IBC does not distinguish between secured creditors having first charge and secured creditors having a subservient charge

In TDB Judgment, NCLAT held that secured creditors relinquishing security under Sec 52 are to be considered as ‘one class’ and ranked equally under Sec 53(1)(b)(ii).

Both, SIDBI Judgment and TDB Judgment have been challenged and are pending adjudication before the Supreme Court.

So today, if you go into liquidation, your ICA priority may be wiped out and all secured creditors share equally. If you acted in reliance of first charge and gave higher exposure, you suffer. Supreme Court decision pending is critical.

C. US / International Persuasive Cases on Enforcement

6. Beal Bank, S.S.B. v. WestPoint International Inc. (Delaware Chancery 2007)
$480 million credit agreement with numerous lenders. Beal Bank tried to enforce independently despite intercreditor agreement requiring agent bank consent. Court held: junior lender cannot take enforcement action that is prohibited by ICA; standstill is enforceable.

7. In re Momentive Performance Materials Inc. - 2nd Circuit 2017
Senior and Second-lien notes had ICA with explicit "silent second lien" provisions. Second-lien holders objected to cramdown plan. US Court held ICA is enforceable in bankruptcy, but only to extent it says "you cannot object to plan that senior approves". Failure to align by objecting = breach of ICA.

8. In re LATAM Airlines Group S.A. - SDNY Bankruptcy 2022
Dispute over $1.3B intercompany loans and intercreditor agreement dated 29 May 2015 among Wilmington Trust etc. Court upheld intercompany loan claims despite objections, emphasizing that intercreditor terms must be clear and board approvals must exist, otherwise claim fails. Lesson: ICA must be properly executed.

4. Consequences of Failure to Align

1. Regulatory: Under RBI circular, if lenders fail to enter ICA or fail to implement RP, 20% additional provision + 35% provision after 365 days.
2. Contractual Damages: Non-compliant lender liable to other lenders for loss caused by unilateral enforcement.
3. Resolution Plan Failure: NCLT can reject plan if CoC actions violate ICA voting mechanism - seen in Power Trust v Bhuvan Madan (SC 18 Feb 2026) where failure to satisfy pre-conditions of restructuring does not amount to novation and restores original terms.
4. Priority Loss: If you don't enforce through agreed mechanism, you may be treated as unsecured.

5. How to Ensure Alignment - Best Practice Checklist

1. Sign ICA within 30 days of first default report - mandatory.
2. Include explicit clause: "ICA does not prevent filing under IBC Sec 7, but filing lender shall vote as per ICA".
3. Register inter-se charge with ROC and CERSAI - otherwise priority not provable under SIDCO Leathers.
4. Provide for Section 11 SARFAESI arbitration clause for inter-creditor disputes.
5. In CoC, record dissent if ICA breached, and file IA before NCLT before distribution under Sec 53.