A landmark NCLAT judgment has sparked a major debate by upholding a resolution plan that offers a "NIL" payout to operational creditors.
A Precedent for Legality
The court found the resolution plan to be legally sound. It demonstrated that a zero-payout plan can be valid under the IBC framework.
Upholding CoC's Commercial Wisdom
The verdict reinforces the preeminence of the CoC’s commercial wisdom. This reaffirms the committee's power to make tough decisions to rescue the corporate debtor.
Equity Only for the "Similarly Situated"
The NCLAT’s decision was grounded in the Supreme Court’s precedent from the Essar Steel case. This clarified that equitable treatment is required only for creditors who are similarly situated.
The Financial Creditor’s Priority
The judgment reinforces the priority of financial creditors. They are recognized as the primary drivers of the resolution process due to their significant exposure.
A Zero-Payout Justification
The court acknowledged that the liquidation value was insufficient. This meant it could not even satisfy the secured financial creditors' claims, justifying the zero payout.
An Investor-Friendly Signal
The verdict sends a clear signal that the IBC’s primary objective is to rescue the corporate debtor as a going concern. This remains true even if it means no recovery for some creditors.
The Onus on Legislators
The tribunal noted the harshness of the current legislative scheme. It left the onus on policymakers to bring about change for operational creditors.
A Blow to Operational Creditors
This ruling is viewed as a significant blow to operational creditors’ interests. It is particularly impactful for MSMEs who are often left with no recourse.
The Balance of Efficiency and Equity
The judgment ultimately reinforces the IBC’s market-driven philosophy. It sparks a new debate on whether the current legal framework has struck the right balance between efficiency and fairness.