Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta

Facts

During the corporate insolvency resolution process of Essar Steel India Ltd., the Committee of Creditors approved ArcelorMittal's resolution plan, which provided differential recoveries to secured financial creditors and operational creditors. The NCLAT modified the distribution to place financial and operational creditors on a near-equal footing and treated the CoC's role as limited. The financial creditors and the resolution applicant challenged this before the Supreme Court, which also considered the 2019 amendments to the Code.

Issues

• Whether the NCLAT could interfere with and rewrite the distribution decided by the CoC's commercial wisdom
• Whether financial and operational creditors must be treated equally in the distribution under a resolution plan
• Whether the mandatory timelines and the role of the adjudicating authority under the amended Code are valid

Arguments

The CoC and resolution applicant argued that distribution among creditors is a matter of commercial wisdom of the CoC, that the Code permits differential treatment so long as operational creditors get at least liquidation value, and that NCLAT exceeded its jurisdiction by substituting its own scheme. The operational creditors argued for equal treatment and for judicial scrutiny of fairness of the plan's distribution.

Held

The Supreme Court set aside the NCLAT's equal-distribution direction and restored the primacy of the CoC's commercial wisdom, holding that the manner of distribution is for the CoC to decide and that NCLT/NCLAT cannot sit in appeal over the commercial merits of the plan. It clarified that fair and equitable treatment under Section 30(2) does not mean identical treatment, and that secured financial creditors may receive more, subject to operational creditors receiving the minimum protected amount. The mandatory outer limit on completion of CIRP was read down to the extent it left no judicial discretion, so that the time may be extended in exceptional cases. The Court emphasised the limited grounds of judicial review of resolution plans.

Ratio decidendi

The CoC's commercial wisdom in approving a resolution plan and deciding inter-se distribution among creditors is supreme and not subject to merits review; 'fair and equitable' treatment permits differential, not equal, distribution.

Significance

The definitive statement on the supremacy of the Committee of Creditors' commercial wisdom and the limited scope of judicial review under the IBC, settling the financial-versus-operational creditor distribution debate; a constantly cited authority shaping resolution-plan jurisprudence.

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