Operational Creditors Getting Zero Payouts, Hands Of Courts Are Tied, Observed NCLAT, Delhi

In the following case, the appeal concerns an operational creditor challenging the approval of a resolution plan by the National Company Law Tribunal (NCLT) that provided no compensation for operational creditors. The corporate debtor, Vinayak Rathi Steels Rolling Pvt. Ltd., was put into the Corporate Insolvency Resolution Process (CIRP).

The appellant's claim was partially rejected, and a resolution plan was later approved, favouring financial creditors while excluding operational creditors. The appellant argued that this violates Section 30(2) of the Insolvency and Bankruptcy Code (IBC), which mandates consideration of all creditors. However, the NCLT found no error, noting that in liquidation, the operational creditor would receive no payout

The Court stated that Section 30(2)(b) of the Insolvency and Bankruptcy Code (IBC), 2016 ensures operational creditors receive at least the liquidation value of the corporate debtor. The Supreme Court, in the case of Committee of Creditors of Essar Steel India Ltd., Through Authorized Signatory Vs. Satish Kumar Gupta & Ors^[1] case, clarified that while operational and financial creditors are treated differently, operational creditors must receive at least what they would get in liquidation. The court also highlighted that the commercial wisdom of the Committee of Creditors (CoC) in approving a resolution plan with differential payments among creditors should not be interfered with, if it complies with the IBC's provisions.

The tribunal in the latter part of the judgement also cited the judgement of Supreme Court in the case of Damodar Valley Corporation' Vs. Dimension Steel and Alloys Pvt. Ltd. & Ors.^[2] stating that

“31. We are consistently receiving the Plans, where Operational Creditors either not paid any amount towards their claim or paid negligible amount, sometime even less than 1%. In the present case, the Operational Creditors have been given only miniscule of their admitted claim to the extent of only 0.19%. As the law stand today, no exception can be taken to such Plans, which provide payment to Operational Creditor in accordance with Section 30(2)(b) of the Code. However, the time has come when it should be examined by the Government and the Board to find out as to whether there are any grounds for considering change in the legislative scheme towards the payment to the Operational Creditors, which also consist of Government dues and other statutory dues. We make it clear that our observation is only to facilitate the Government and other competent Authority to consider this issue and take decision, so as to the objective of equitable and fair distribution can be fulfilled with clear parameters to guide the all concerned to arrive at the fair and equitable distribution."

The tribunal in the end stated that if the liquidation value for Operational Creditors is zero, they receive nothing under the law. As a result, upholding Damodar Valley case, unless the specific amendments are done in the legislation, the current scenarios as adopted by the judiciary for operational creditors remains the same. Therefore, the NCLAT while upholding NCLT decision stated that there is no error in the Adjudicating Authority's decision to approve the Resolution Plan as per the CoC's approval.

The appeal is dismissed.

Case: Rajat Metaal Polychem Pvt. Ltd. Vs. Mr. Neeraj Bhatia RP Vinayak Rathi Steels Rolling Mills Pvt. Ltd. and Anr.

Date: Sept 9th 2024

For Appellant: Mr. Mrinal Harsh Vardhan, Mr. Kailash Ram, Advocates.

For Respondents: Mr. Ashutosh Kumar, Advocate.