Insolvency & Bankruptcy Code Commercial Wisdom•2 min read•(2020) 8 SCC 531

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

Bench: Three-Judge Bench (R.F. Nariman, Surya Kant & V. Ramasubramanian, JJ.)
Appeals under Special Statutes (IBC, NGT, Telecom & Electricity)
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Core Legal Ratio Decidendi

"Under the Insolvency and Bankruptcy Code, the commercial wisdom of the Committee of Creditors reigns supreme; adjudicating tribunals possess no jurisdiction to assess the business merits or alter distributions approved under Section 30(4)."

I
Step 1

Issues Before the Court

  1. (i)

    Whether the adjudicating authority (NCLT) or appellate tribunal (NCLAT) has jurisdiction to modify or reject a resolution plan approved by the requisite majority of the Committee of Creditors (CoC) on grounds of fairness or equity?

  2. (ii)

    Are operational creditors entitled to absolute parity in distribution of resolution proceeds on par with secured financial creditors under the Insolvency and Bankruptcy Code (IBC)?

R
Step 2

Law & Rules Applicable

  1. (i)

    Insolvency and Bankruptcy Code, 2016 (IBC), Section 30(2), 30(4), 31(1), 53.

  2. (ii)

    Insolvency and Bankruptcy Code (Amendment) Act, 2019.

  3. (iii)

    Precedents: Swiss Ribbons (P) Ltd. v. Union of India; K. Sashidhar v. Indian Overseas Bank.

A
Step 3

Application to Facts & Circumstances

In the resolution of Essar Steel (featuring over Rs 54,000 crores in corporate debt), ArcelorMittal's Rs 42,000 crore resolution plan was overwhelmingly approved by the CoC. However, the NCLAT modified the plan by creating parity between financial creditors and operational creditors, distributing proceeds proportionately.

The Supreme Court set aside the NCLAT's judgment, holding that the tribunal committed a grave jurisdictional error. Equality under Article 14 applies to equals, not unequals; financial creditors (who take commercial risks and pump capital) cannot be equated with operational creditors.

Justice Nariman held that the 'Commercial Wisdom' of the CoC is non-justiciable. Neither NCLT nor NCLAT possesses appellate authority over the business decisions of the CoC.

The judicial review of NCLT/NCLAT is strictly limited to verifying compliance with Section 30(2) of the Code—ensuring payment of operational debt equal to liquidation value and priority over financial debt.

C
Step 4

Conclusion & Ruling

  1. (i)

    The commercial wisdom of the Committee of Creditors is supreme and cannot be interfered with by tribunals on subjective grounds of equity.

  2. (ii)

    Secured financial creditors are legally entitled to receive differential and superior distribution compared to operational and unsecured creditors.

  3. (iii)

    The judgment of the NCLAT was overturned, paving the way for the historic takeover of Essar Steel by ArcelorMittal.

Authorities Cited

Full texts open on Indian Kanoon in a new tab.

  1. K. Sashidhar v. Indian Overseas Bank, (2019) 12 SCC 150Case brief →Full text of K. Sashidhar v. Indian Overseas Bank on Indian Kanoon
  2. Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17 : AIR 2019 SC 739Case brief →Full text of Swiss Ribbons (P) Ltd. v. Union of India on Indian Kanoon
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