Supreme Court Upholds Commercial Wisdom of Committee of Creditors in Essar Steel Resolution, Restricts NCLAT's Jurisdiction

Court affirms primacy of Committee of Creditors’ decisions under Insolvency and Bankruptcy Code, 2016; sets aside NCLAT’s order altering distribution of dues among secured and unsecured creditors; validates 2019 amendments to IBC aimed at expediting insolvency resolution

In a landmark judgment delivered on November 15, 2019, the Supreme Court of India in the case of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta has clarified the scope and limits of judicial review in the insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 (IBC). The apex court decisively upheld the commercial wisdom exercised by the Committee of Creditors (CoC) in approving the resolution plan submitted by ArcelorMittal India Private Limited for Essar Steel, overruling the National Company Law Appellate Tribunal’s (NCLAT) attempts to modify the distribution of payments among secured and unsecured creditors.

The judgment arose from a complex insolvency resolution process involving Essar Steel India Limited, where the CoC, comprising primarily of secured financial creditors, had approved a resolution plan by a 92.24% majority. The plan provided differential treatment to creditors based on the value and quality of their security interests. Standard Chartered Bank, one of the financial creditors, contended that it was unfairly treated as its dues were significantly reduced compared to other secured creditors. The NCLAT, in an earlier decision, had sought to equalize payments among financial and operational creditors, disregarding security interests and ordering increased payments to operational creditors and dissentient financial creditors alike. It also admitted several additional claims post approval of the resolution plan.

The Supreme Court, while hearing the appeal filed by the Committee of Creditors, emphatically held that the jurisdiction of the National Company Law Tribunal (NCLT) and the NCLAT in approving a resolution plan is circumscribed and cannot intrude upon the commercial decisions made by the CoC. The Court relied heavily on its earlier judgment in K. Sashidhar v. Indian Overseas Bank, affirming that the CoC’s decision on the feasibility and viability of the resolution plan—including the distribution of proceeds among various classes of creditors—is final and binding, subject only to limited judicial review for conformity with statutory provisions.

Key highlights of the Supreme Court’s ruling include:

1. Limited Judicial Review:

 The Court clarified that the Adjudicating Authority (NCLT) and the Appellate Tribunal (NCLAT) can only examine whether the resolution plan complies with the requirements of Section 30(2) of the IBC, such as payment of insolvency resolution costs, repayment to operational creditors, and conformity with applicable laws. They cannot substitute their own commercial judgment for that of the CoC.

2. Differential Treatment of Creditors:

 The Court upheld the principle that “equitable treatment” under insolvency law means fair treatment of similarly situated creditors but does not mandate identical treatment across different classes. It recognized the legitimate distinction between secured and unsecured creditors, and financial and operational creditors, emphasizing the importance of respecting security interests to incentivize lending and successful resolution.

3. Constitutionality of 2019 Amendments:

 The Court upheld the constitutional validity of Sections 4 and 6 of the Insolvency and Bankruptcy Code (Amendment) Act, 2019. These amendments extended the insolvency resolution timeline to 330 days (including legal proceedings) and clarified the manner of payment to operational and dissenting financial creditors, ensuring fair and equitable treatment without encroaching upon the CoC’s commercial discretion.

4. Role of the Resolution Professional and Sub-Committees:

 It was affirmed that the resolution professional’s role is primarily administrative, including due diligence and facilitation of the resolution plan process. The formation of sub-committees by the CoC for negotiation purposes was held permissible, provided ultimate decision-making remains with the CoC.

5. Extinguishment of Personal Guarantees:

 The Court ruled that once a resolution plan is approved by the CoC and sanctioned by the Adjudicating Authority, it binds all stakeholders, including guarantors. It set aside the NCLAT’s view that personal guarantees would survive, thereby endorsing the concept of a “fresh start” for the successful resolution applicant.

6. Rejection of NCLAT’s Admission of Additional Claims:

 The Supreme Court directed that claims not admitted by the resolution professional or adjudicated upon should not be entertained post approval of the resolution plan, to avoid uncertainty and multiplicity of litigation.

7. Use of Profits During Insolvency Process:

 The Court rejected the NCLAT’s directive to distribute profits generated during the insolvency resolution process towards creditor payments, as it was contrary to the terms of the Request for Proposal (RFP) agreed upon by the parties.

This verdict marks a crucial reaffirmation of the legislative design behind the IBC, which vests decisive commercial decision-making power in financial creditors to enable swift and efficient revival of distressed companies. It preserves the sanctity of security interests and discourages judicial overreach into commercial negotiations, thereby promoting certainty and stability in insolvency proceedings.

The judgment also sends a strong message endorsing the 2019 amendments aimed at reducing delays and ensuring timely completion of insolvency resolution processes, which is vital for maximizing asset value and protecting stakeholders’ interests.

In conclusion, the Supreme Court’s ruling in this case strengthens the authority of the Committee of Creditors, limits judicial interference to strict statutory compliance, and upholds the core objectives of the Insolvency and Bankruptcy Code, 2016 — promoting time-bound resolution and maximization of asset value while balancing the interests of all stakeholders.

Statutory provisions

Insolvency and Bankruptcy Code, 2016 Sections 4, 6, 7, 12, 18, 20, 21, 22, 23, 24, 25, 28, 29, 29A, 30, 31, 32, 33, 53, 60, 61; Insolvency and Bankruptcy Code (Amendment) Act, 2019 Sections 4, 6; Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 Regulations 36, 37, 38, 39

Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar Gupta (SC) : Law Finder Doc Id # 1622165