The rules of the Bar Council of India prohibit law firms from advertising and soliciting work through communication in the public domain. This website is meant solely for the purpose of information and not for the purpose of advertising. Kings & Alliance LLP does not intend to solicit clients through this website. We do not take responsibility for decisions taken by the reader based solely on the information provided in the website. By clicking on ‘ENTER’, the visitor acknowledges that the information provided in the website (a) does not amount to advertising or solicitation and (b) is meant only for his/her understanding about our activities and who we are.
By continuing to use this site you consent to the use of cookies on your device as described in our Cookie Policy
Introduction
In the complex arena of corporate insolvency, where the fate of a failing company hangs in the balance, a crucial and often contentious question arises: how are the interests of different creditors balanced? Is a bank, which provided a large loan, more important than a small business that supplied goods or services? The recent pronouncement by the NCLAT1 in New Delhi offers a decisive answer, underscoring the supremacy of the CoC2 in the resolution process. The NCLAT, in a landmark ruling, held that an Adjudicating Authority (NCLT) cannot interfere with a resolution plan approved by a CoC with a 100% voting majority, even if the plan provides no payment to operational creditors, as long as their claims have been properly dealt with.
This judgment emerged from three appeals filed by operational creditors against an NCLT order that approved a resolution plan, which became the focal point of a legal battle. The central question before the tribunal was whether the approved resolution plan, which provided zero payment to the operational creditors, was legally sound. Was this a case of a flawed plan, or simply the harsh reality of the Insolvency and Bankruptcy Code (IBC)?
The appellants, the operational creditors, entered the legal fray with a passionate plea for equity, arguing that the resolution plan did not adequately consider their claims. Their counsel contended that the Adjudicating Authority had committed a grave error by approving a plan that effectively ignored them. They emphasized that operational creditors were the very lifeline of the corporate debtor, providing essential goods and services, and therefore, their claims deserved priority. How could a plan be considered “equitable” if it completely disregarded those who helped the company function day-to-day?
To support their position, they invoked Regulation 38(1A) of the IBBI3, which mandates a resolution plan to contain a statement on how it has dealt with the interests of all stakeholders, including operational creditors. They argued that in this case, the plan failed to demonstrate any such consideration. To what extent, they asked, can a plan be considered compliant if it offers no explanation for why certain creditors are receiving nothing? The appellants also relied on the judgment of the Hon’ble Supreme Court in ‘CoC of Essar Steel India Limited’ Vs. ‘Satish Kumar Gupta & Ors4.’ and a similar decision by the NCLAT in ‘Hammond Power Solutions Private Limited’ Vs. ‘Sanjit Kumar Nayak & Ors5.’, where the resolution plan was set aside for a similar failure to consider the dues of operational creditors.In their view, the NCLAT’s own precedent mandated the reversal of the impugned order.
In response, the counsel for the SRA6 and the RP7 presented a formidable defense, grounding their arguments in the statutory provisions of the IBC and the established principle of the CoC’s commercial wisdom. They countered the appellants’ claims by asserting that the Adjudicating Authority had indeed considered the treatment of the operational creditors’ claims and found it to be in compliance with the law. They pointed to a crucial aspect of the IBC framework: the liquidation value. The SRA’s counsel explained that after accounting for the financial creditors, the liquidation value for the operational creditors was effectively ‘NIL’.
Thus, under Section 30(2)(b) of the IBC, the operational creditors were not entitled to any payment. Is it not, then, the case that the resolution plan was simply a reflection of this legal reality? They passionately argued that the 100% vote share in favor of the resolution plan was a clear testament to the CoC’s commercial wisdom, a principle that has been repeatedly upheld by the Hon’ble Supreme Court. They relied on the landmark judgment in ‘K. Sashidhar’ Vs. ‘Indian Overseas Bank & Ors8.’, which established that the Adjudicating Authority’s power to interfere with the CoC’s commercial decisions is severely limited. To a greater extent, they also cited the Hon’ble Supreme Court’s ruling in ‘CoC of Essar Steel India Limited’ and the NCLAT’s own decision in ‘Rajat Metaal Polychem Private Limited’ Vs. ‘Neeraj Bhatia & Anr9.’, both of which reaffirmed the sanctity of the CoC’s collective business judgment. The core of their argument was that the resolution plan was not an act of injustice but a sound commercial decision that adhered to the legislative scheme of the IBC.
Having considered the arguments of both sides, the NCLAT delved into the heart of the matter, meticulously examining the legal framework and precedents. The bench first turned its attention to Section 30(2) of the IBC, which outlines the mandatory requirements for a resolution plan. It noted that the provision, particularly after the 2019 amendment, clearly states that a plan must provide a payment to operational creditors that is no less than the amount they would have received in a liquidation scenario, or the amount they would have received had the distribution been based on the priority order in Section 53—whichever is higher. So, what did the resolution plan in this case propose? The NCLAT found that the plan, approved by the CoC with a 100% voting share, indeed provided a ‘NIL’ payment to the operational creditors, a decision which was at the crux of the appellants’ challenge.
The tribunal then scrutinized the core of the appellants’ argument, which was heavily reliant on the Supreme Court’s pronouncement in ‘CoC of Essar Steel India Limited’ vs. ‘Satish Kumar Gupta & Ors.’. While the NCLAT acknowledged the importance of this case, it highlighted a crucial distinction drawn by the Supreme Court itself: the principle of “equality for all” does not apply to different classes of creditors. The NCLAT cited paragraphs from the Essar Steel judgment which clarified that equitable treatment is only required for “similarly situated creditors.” The Supreme Court had expressly warned against the misinterpretation of its ruling in the ‘Swiss Ribbons India Private Limited10‘ case, stating that it should not be read to mean that financial and operational creditors must be paid the same amounts in a resolution plan. On the contrary, the NCLAT emphasized that the IBC and its regulations, specifically Regulation 38, only mandate that a plan must state how it has dealt with the interests of operational creditors, which is not the same as mandating equal payment.
This brought the NCLAT to the appellants’ second key reliance: the tribunal’s own judgment in ‘Hammond Power Solutions Private Limited’ vs. ‘Sanjit Kumar Nayak & Ors.’. The appellants saw this case as a direct parallel, where the NCLAT had set aside a resolution plan for providing no payment to operational creditors. However, the NCLAT was quick to distinguish the two cases. It explained that the decision in Hammond Power Solutions was based on its unique facts. In that case, the tribunal found that the CoC’s minutes did not reflect any reasons for giving a “NIL” payout, nor did the record show that the CoC had properly taken into account the interests of all stakeholders, as required by law. The NCLAT had also noted that the resolution applicant in that case had initially proposed a payment to the operational creditors, which was later reduced to zero without a clear rationale. But was that what happened here?
The NCLAT found that in the present case, the resolution plan was explicit in its treatment of all stakeholders, with a dedicated section detailing the ‘NIL’ payout to operational creditors other than workmen and government dues. This was based on the clear finding that the liquidation value of the corporate debtor was not sufficient to even satisfy the secured financial creditors, whose admitted claims were a staggering ₹8,232 crore against a total payout of only ₹1,693 crore. In such a scenario, the operational creditors, in the event of liquidation, would have received nothing. Therefore, the tribunal concluded that the resolution plan did not breach Section 30(2)(b) of the IBC.
Acknowledging the harsh reality of this outcome for operational creditors, the NCLAT referred to its earlier judgment in ‘Damodar Valley Corporation’ vs. ‘Dimension Steel and Alloys Pvt. Ltd. & Ors11.’, where it had candidly observed that the legislative scheme, as it stands, can be “harsh” for operational creditors. The tribunal had even suggested that the government and the Insolvency and Bankruptcy Board of India (IBBI) should consider whether a legislative change is needed to ensure a fairer distribution. However, as the law currently stands, the tribunal could not substitute its own judgment for the commercial wisdom of the CoC, especially when the plan had been approved with a 100% vote share. The NCLAT’s role, as laid down in ‘K. Sashidhar’ vs. ‘Indian Overseas Bank & Ors.’ and reiterated in Essar Steel, is limited to ensuring the plan is not in breach of statutory provisions. Since no such breach was found, the appeals were ultimately dismissed.
Conclusion
This definitive ruling by the NCLAT marks a pivotal moment in the evolution of India’s insolvency regime, solidifying the preeminence of the CoC’s commercial wisdom. By upholding the resolution plan despite a zero payout to operational creditors, the tribunal has unequivocally prioritized the recovery of financial creditors, who are often the principal drivers of the resolution process. The judgment clarifies that as long as a resolution plan meets the minimum legal threshold under Section 30(2)(b)—which in this case was a ‘NIL’ amount, given the lack of liquidation value for operational creditors—the Adjudicating Authority’s power to intervene is severely limited. This pragmatic approach, while harsh, provides much-needed certainty to investors and resolution applicants, assuring them that a commercially sound plan, backed by the CoC, will not be easily overturned on grounds of perceived inequity.
Looking ahead, this verdict is likely to have significant ramifications for the rights and role of operational creditors. While the NCLAT has acknowledged the harshness of the current legislative scheme, its hands-off approach effectively leaves the onus on policymakers to bring about change. This raises critical questions for the future: Will the government or the IBBI consider amending the IBC to provide a more robust safety net for operational creditors, many of whom are micro, small, and medium enterprises (MSMEs)? Should the liquidation value be the sole determinant of an operational creditor’s entitlement, or should the law mandate a minimum, symbolic payment to all admitted creditors to ensure fairness? These are the debates that will shape the next phase of insolvency law in India, forcing a re-evaluation of whether the balance between efficiency and equity has been struck correctly.
Ultimately, the judgment reinforces the market-driven philosophy of the IBC, where financial creditors, with their significant exposure and a collective stake in the corporate debtor’s future, hold the most power. The verdict sends a clear signal that the primary objective of the IBC is to rescue the corporate debtor as a going concern, and in this pursuit, tough commercial decisions—even those that result in no recovery for some creditors—are permissible. While this may be viewed as a blow to the interests of operational creditors, it aligns the legal framework with commercial realities, promoting a more predictable and investor-friendly environment. The NCLAT has effectively passed the baton to the legislature, inviting a broader conversation on whether the current distribution mechanism truly serves the spirit of ‘fair and equitable’ treatment for all stakeholders in a distressed company.
Citations
Expositor(s): Adv. Anuja Pandit
