The recent judgment by the National Company Law Appellate Tribunal (NCLAT) in NCC Ltd. v. Golden Jubilee Hotels Pvt. Ltd.1 sheds light on the treatment of operational creditors under the Insolvency and Bankruptcy Code, 2016 (IBC). This ruling emphasizes the evolving judicial perspective regarding the categorization and sub-classification of operational creditors, highlighting the need for flexibility based on objective considerations.
This judgment seeks to establish a significant precedent regarding the sub-classification of operational creditors within IBC proceedings. It affirms that such classifications are permissible when grounded in operational necessity and commercial wisdom and aimed at maximizing value for the corporate debtor. The judgment emphasizes pragmatism and commercial realities in resolving insolvency cases, balancing statutory rights with practical needs during resolution processes.
A review of this judgment allows us to understand that some creditors may play crucial roles in the sustainability and operational success of the Corporate Debtor, which could justify preferential treatment for those creditors. The extent of this preferential treatment is contingent upon the contributions made by these creditors to the Corporate Debtor's economic situation. The Committee of Creditors (CoC) has the authority to distinguish among creditors within the same category if the ongoing involvement of certain creditors is vital for the effective resolution of the Corporate Debtor, as seen in this case.
The ruling of this judgment clarifies that the principle of "fair and equitable" treatment does not require equal treatment among all creditors within the same class, particularly when the operational needs of the Corporate Debtor necessitate prioritizing certain creditors. Therefore, it is crucial for the CoC to ensure that any sub-classification of creditors aligns with operational realities while remaining free from arbitrary discrimination, which is essential for achieving a successful resolution of the Corporate Debtor. Furthermore, this judgment emphasizes that when assessing the resolution plan, the CoC must ensure that the proposed distribution of proceeds by the Successful Resolution Applicant (SRA) aims to maximize the Corporate Debtor's capital.
Numerous judgments have consistently affirmed that the CoC possesses supreme authority regarding the structuring of resolution plans. This judgment reinforces our confidence in the CoC's commercial wisdom, which should remain free from judicial interference as long as it complies with the provisions of the Insolvency and Bankruptcy Code (IBC). Consequently, during their review of resolution plans, the CoC should focus on commercially viable solutions that may include differentiated payment schemes for creditors within the same class.
Case Background
Following the initiation of the Corporate Insolvency Resolution Process (CIRP) for Golden Jubilee Hotels Pvt. Ltd. (the Corporate Debtor), various operational creditors submitted claims to the Resolution Professional (RP). These claims were either partially admitted or entirely excluded. The approved resolution plan, proposed by the Successful Resolution Applicant (SRA), established a distinct category for two operational creditors—Telangana State Tourism Corporation Limited(formerly known as Youth Advancement Tourism and Culture Department) (YATCL) andShilparamam Arts, Crafts & Cultural Society (Society) — labelling them as "Special Operational Creditors". Under this plan, these two entities were set to receive full payment of their claims, while other operational creditors received nothing due to the Corporate Debtor's nil liquidation value.
Legal Contention
The aggrieved operational creditors challenged this resolution plan, arguing that the sub-classification and allocation of nil payments violated principles of equity and non-discrimination as outlined in Section 30 (2) (b) of the IBC. They contended that prioritizing one set of operational creditors over others lacked a valid statutory or contractual basis.
NCLAT's Analysis
In its deliberation, the NCLAT recognized that YATCL and Society were not just ordinary suppliers but key stakeholders due to their roles as lessors under a Public-Private Partnership (PPP) arrangement. The Hon'ble NCLAT acknowledged that maintaining favourable relationships with these entities was crucial for the Corporate Debtor's business continuity. Despite noting that the IBC does not explicitly allow for such sub-classification among operational creditors, the NCLAT dismissed the appeal based on several key perspectives:
- Pivotal Role of Certain Creditors: The Hon'ble NCLAT held that some creditors may play a critical role in ensuring a corporate debtor's viability, justifying their preferential treatment. It clarified that "equity does not mean equality," emphasizing that "fair and equitable" treatment does not necessitate equal treatment among all creditors within the same class. The economic realities faced by the Corporate Debtor permitted differentiation among creditors based on their importance.
- Commercial Wisdom of CoC: The Hon'ble NCLAT reiterated that the CoC possesses supreme authority in structuring resolution plans, including creditor categorization and prioritization. Judicial interference is limited to ensuring compliance with IBC provisions; thus, commercial decisions made by the CoC should not be questioned.
- Viability of Corporate Debtor: The Hon'ble NCLAT underscored that sub-classifying operational creditors and designating a "Special Operational Creditor" category was essential for achieving successful resolution outcomes. Prioritizing YATCL and Society was justified given their critical role in ongoing operations.
While the NCLAT's judgmentis poised to significantly influence future insolvency cases in India, particularly concerning the treatment of operational creditors, here are several perspectives on how this ruling may shape upcoming legal interpretations and practices:
- Authority of the CoC: The ruling reinforces the CoC's power in shaping resolution plans, with minimal judicial intervention, thereby promoting a business-centric approach to insolvency resolutions.
- Sub-Classification Among Creditors: The judgment legitimizes sub-classification among operational creditors, allowing for differentiated treatment based on their roles, which may lead to more complex creditor hierarchies.
- Impact on Third-Party Operators: Third-party operators may face restrictions similar to promoters under Section 29A of the IBC, limiting their ability to participate in resolution processes if they have historical ties to the corporate debtor.
- Clarification on Rights: The ruling clarifies that while operational creditors can be classified into different categories, they are treated uniformly under the same legal framework, promoting a standardized approach in insolvency proceedings.
- Increased Litigation Potential: The judgment may lead to more litigation as creditors challenge their classifications or treatment, especially with the introduction of sub-classifications.
- Focus on Viability and Sustainability: The emphasis on prioritizing creditors essential for the corporate debtor's viability suggests a shift towards ensuring resolution plans enhance long-term sustainability and maintain key stakeholder relationships.
Conclusion:
The Hon'ble NCLAT in this case has clarified the judicial perspective on sub-classifying operational creditors under the provisions of the Insolvency and Bankruptcy Code (IBC). Such sub-classification among creditors of the same class must be based on operational or commercial necessity, guided by the commercial wisdom of the CoC, and should aim to maximize the value of the Corporate Debtor. Therefore, prioritizing certain creditors should focus on practical and commercial realities essential for the successful resolution of the corporate debtor rather than adhering strictly to statutory equality among creditors. This case underscores that creditor prioritization is determined not by their class but by each creditor's contribution to maximizing the corporate debtor's value.
Additionally, this case helps clarify the statutory rights of operational creditors in relation to the practical needs of the corporate debtor's resolution process, highlighting the strategic importance of demonstrating a creditor's indispensability for the corporate debtor's survival. The classification of "Special Operational Creditors," as recognized in this case, incentivizes operational creditors to showcase their unique contributions during the resolution process and their essential role in supporting the Corporate Debtor's operations. However, it is crucial to note that such sub-classification by SRA and CoC may complicate CIRP proceedings and intensify competition among creditors seeking preferential treatment based on their indispensability.
From a broader perspective, this case introduces flexibility over strict statutory equality among creditors, aligning with the IBC's goal of maximizing corporate debtor wealth while encouraging SRAs to propose innovative resolution plans.
Footnote
1. Comp. App. (AT) (Ins.) No. 426 of 2020 & I.A. No. 1702, 2198, 2199 of 2023
https://ibbi.gov.in//uploads/order/394953f51403e0ee30eaaffa3c3df842.pdf
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