The Supreme Court IBC judgment has highlighted a major concern about the treatment of small operational creditors under the Insolvency and Bankruptcy Code (IBC). The Court observed that MSMEs and statutory local bodies remain significantly disadvantaged because the repayment waterfall places them at the bottom of the priority list. While deciding appeals arising from the Bhushan Steel insolvency, the Bench urged the Law Commission of India and the legislature to examine whether a fairer repayment framework could protect vulnerable creditors without affecting the efficiency and commercial certainty of the insolvency resolution process.
Bench Hears Appeals In Bhushan Steel Insolvency
A Bench of Justice Manoj Misra and Justice Manmohan heard appeals filed by Tata Steel, the successful resolution applicant for Bhushan Steel Limited. Tata Steel challenged Bombay High Court orders that allowed a recovery suit filed by operational creditor Varsha to continue even after approval of the company’s resolution plan. The Bench also examined a connected issue involving arbitration proceedings initiated by Masyc Projects Private Limited.
Background Of The Dispute
Before the Corporate Insolvency Resolution Process (CIRP) began, Varsha filed a recovery suit against Bhushan Steel for approximately Rs. 38.89 lakh. Masyc also initiated arbitration proceedings to recover its dues.
After the insolvency process commenced, both entities submitted claims as operational creditors. The Resolution Professional admitted the disputed claims at a notional value of Re. 1.
Tata Steel argued that the approved resolution plan barred all proceedings relating to claims that arose before its approval. According to the company, the plan gave it a clean slate, making all stakeholders bound by its terms.
Varsha and Masyc disagreed. They argued that the resolution plan preserved disputed claims that remained pending before courts and arbitral tribunals. Therefore, they claimed their proceedings could continue until the competent forums decided those disputes.
Supreme Court On Extinguishment Of Claims
The Supreme Court rejected the submissions made by Varsha and Masyc. The Bench reiterated that claims not included in an approved resolution plan cannot survive after its approval. It explained that the Insolvency and Bankruptcy Code intends to give the successful resolution applicant a fresh start without facing unexpected liabilities.
The Court also rejected allegations that fraud or manipulation affected the resolution plan. It noted that the final list of operational creditors had already attained finality.
The Bench carefully examined the treatment of the Re. 1 claims. It observed that replacing Note 3 in the interim list with Note 2 in the final list fundamentally changed the status of those claims. Instead of remaining provisional, the claims became quantified at Re. 1 with finality. Therefore, the Court refused to treat the nominal valuation as a mechanism for keeping the disputes alive.
The Bench read the resolution plan as a whole and concluded that it extinguished all legal proceedings relating to pre-resolution claims except for payments specifically provided under the Operational Creditors Settlement Amount.
The resolution plan allocated Rs. 1,200 crore for operational creditors. Out of this amount, Rs. 1,000 crore went to essential and critical operational creditors. The remaining Rs. 200 crore covered operational creditors other than employees, workmen, and related parties. The Court clarified that only claims approved by the Committee of Creditors before March 20, 2018, qualified for payment from this allocation.
Clean Slate Doctrine Reinforced
The Bench explained why unresolved claims cannot remain pending indefinitely after approval of a resolution plan. Allowing such claims to continue would expose a successful resolution applicant to uncertain liabilities years later. That outcome would defeat the clean slate doctrine and undermine confidence in the insolvency framework.
Accordingly, the Court held that all civil suits and arbitration proceedings involving claims that had not crystallised into determinable and quantifiable amounts before the NCLT approved the resolution plan stood extinguished, withdrawn, waived, or abated.
Court Flags Concerns Over Small Operational Creditors
While deciding the appeals, the Bench also highlighted a broader policy concern. It acknowledged that the Supreme Court had earlier upheld the distinction between financial and operational creditors in Swiss Ribbons Private Limited v. Union of India. However, the Bench observed that the present framework does not adequately protect small operational creditors.
The judges noted that MSMEs and statutory local bodies often lack the financial capacity to absorb even modest losses. As a result, these creditors frequently adopt aggressive litigation strategies during insolvency proceedings to protect their interests.
The Court emphasised that only the legislature can change the repayment waterfall. It therefore requested the Law Commission of India and Parliament to examine whether they can create a more balanced repayment mechanism. Such reforms should continue to preserve the speed and commercial certainty of insolvency resolution while reducing hardship for vulnerable operational creditors.
Outcome Of The Appeals
The Bench allowed Tata Steel’s appeals and set aside the Bombay High Court’s orders along with the trial court’s decision refusing to dismiss the recovery suit.
The Court dismissed Varsha’s recovery suit and Masyc’s arbitration proceedings. It held that both claims stood extinguished once the resolution plan received approval.
Significance Of The Ruling
The Supreme Court IBC judgment strengthens the Court’s consistent position that an approved resolution plan settles all pre-resolution claims and prevents stakeholders from reviving disputes through civil suits or arbitration after the plan becomes final. At the same time, the Court’s observations on the treatment of small operational creditors signal the need for legislative review. Those remarks could influence future amendments to the Insolvency and Bankruptcy Code and shape reforms aimed at improving protection for MSMEs and statutory bodies during corporate insolvency proceedings.
