Adv. Lazim Vengattil, Associate, Alishahz Legal LLP
The judgment in NCC Ltd. v. Golden Jubilee Hotels Pvt. Ltd. and Ors. (Comp. App. (AT) (Ins.) No. 426 of 2020 & I.A. No. 1702, 2198, 2199 of 2023) examines the legality of creating a subclass within operational creditors and whether differential treatment among them is permissible under the Insolvency and Bankruptcy Code (IBC), 2016. The Code categorizes creditors into two main types: financial creditors and operational creditors, without explicitly allowing for further sub classifications. However, in this case, the resolution plan designated the Youth Advancement Tourism and Culture Department (YATCL) and Shilparamam Arts, Crafts & Cultural Society as “Special Operational Creditors” and provided for their full recovery, whereas all other operational creditors received zero payment.
LEGALITY OF THE “SPECIAL OPERATIONAL CREDITOR” CLASSIFICATION AND DIFFERENTIAL TREATMENT AMONG CREDITORS
The Tribunal carefully analyzed whether this categorization within operational creditors was lawful and aligned with the IBC’s principles of fairness and equity. It noted that no provision under the Code formally defines a “Special Operational Creditor.” However, the decision to prioritize these creditors was driven by business considerations—YATCL and the Society were land lessors, and their continued cooperation was critical for the corporate debtor’s operations. Drawing on Supreme Court precedents such as Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta, (2020) 8 SCC 531, the Tribunal affirmed that differential treatment among creditors can be justified under commercial wisdom, provided it does not contravene Section 30(2) of the IBC. Since the liquidation value for operational creditors was nil, the Tribunal held that the CoC’s decision to allocate payments selectively was legally sound and aligned with the objectives of corporate insolvency resolution.
ROLE OF THE ADJUDICATING AUTHORITY (NCLT/NCLAT) IN REVIEWING CoC DECISIONS
A pivotal aspect of the ruling was the Tribunal’s emphasis on the limited scope of judicial review over CoC decisions. Under the IBC, the CoC has exclusive authority to approve or reject resolution plans, and courts cannot interfere with its commercial wisdom unless a plan violates statutory provisions. The Tribunal reiterated that the NCLT and NCLAT do not have the jurisdiction to re-evaluate the fairness of CoC-approved decisions unless they violate Section 30(2), which ensures that operational creditors receive at least their liquidation value. In this case, since the liquidation value for operational creditors was determined to be nil, the plan’s treatment of creditors was deemed compliant with the Code. The judgment relied on landmark cases such as K. Shashidhar vs. Indian Overseas Bank & Ors. (2019) 12 SCC 150, which commercial wisdom of the CoC has been given paramount status without any scope for any judicial intervention for ensuring the resolution of the Corporate Debtor within the timelines prescribed in the Code. The Tribunal clarified that the CoC’s decision-making is not limited to equal distribution of funds but must prioritize the successful resolution of the corporate debtor as a going concern. The classification of YATCL and the Society as Special Operational Creditors was not viewed as arbitrary but rather as a strategic business decision essential for the sustainability of the resolution plan. The ruling reaffirmed that the NCLT’s and NCLAT’s role is restricted to ensuring compliance with the Code and does not extend to reassessing CoC’s commercial decisions on equity-based considerations.
CoC’S COMMERCIAL WISDOM AND ITS IMPLICATIONS FOR FUTURE CIRP PROCEEDINGS
The judgment strongly reinforced the principle that the commercial wisdom of the CoC is paramount in insolvency resolution. Citing Pratap Technocrats (P) Ltd. v. Reliance Infratel Ltd. (Monitoring Committee), (2021) 10 SCC 623, the Tribunal reaffirmed that courts must not interfere with CoC-approved plans unless they directly violate statutory provisions. While acknowledging that operational creditors, particularly MSMEs, often receive disproportionately lower recoveries in CIRP proceedings, the Tribunal reiterated that creditor distribution is a matter of commercial strategy rather than a legal entitlement. Any policy-driven changes to address this imbalance must come through legislative amendments rather than judicial intervention. The judgment also discussed the need for potential reforms, suggesting that a calibrated waterfall mechanism in Section 53 of the IBC could ensure operational creditors receive a minimum payout, even if their liquidation value is nil. Ultimately, the ruling upheld the CoC’s authority to approve differentiated treatment among creditors, emphasizing that the CoC had voluntarily taken a greater haircut on financial creditors to ensure the resolution of the corporate debtor. This ruling strengthens the predictability of insolvency proceedings, providing resolution applicants and creditors with greater confidence in the finality of CoC-approved plans, thereby reducing post-approval litigation risks.
CONCLUSION
The judgment in NCC Ltd. v. Golden Jubilee Hotels Pvt. Ltd. is a significant reaffirmation of the CoC’s discretion in CIRP proceedings. It establishes that differential treatment among operational creditors is permissible if justified by commercial rationale and does not violate statutory requirements. The Tribunal reiterated that judicial intervention in CoC decisions is strictly limited, ensuring that insolvency resolution remains a creditor-driven process rather than a court-driven one. While the ruling highlights the challenges faced by operational creditors, it also underscores that any systemic reforms must originate from legislative amendments rather than judicial reinterpretation of the Code. This decision reinforces IBC’s core principles—finality, commercial wisdom, and resolution over liquidation—while maintaining the delicate balance between judicial oversight and creditor autonomy in corporate insolvency resolution proceedings.