Supreme Court Expresses Concerns Over IBC’s Treatment of Small Creditors
The Supreme Court of India has recently voiced significant concerns regarding the Insolvency and Bankruptcy Code (IBC), indicating that it falls short in addressing the interests of small operational creditors, such as Micro, Small, and Medium Enterprises (MSMEs). These observations were made in the case Tata Steel Limited v. Varsha. A bench comprising Justices Manoj Misra and Manmohan noted that under the current insolvency framework, these creditors are notably marginalized.
MSMEs and Local Bodies Disenfranchised
The bench highlighted that the IBC does not adequately protect the position of small operational creditors and statutory local bodies, placing them at the lowest tier of the repayment hierarchy. The Court articulated that “most such entities are ill-equipped to absorb even a minor financial setback and are therefore often compelled to adopt an aggressive and disruptive stance, as the facts of the present matters demonstrate.”
Call for Legislative Review
The Supreme Court suggested that this issue, being within the legislative domain, should be reviewed by the Law Commission and Parliament to ensure a fair and balanced repayment mechanism that retains an efficient insolvency regime.
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Case Background and Supreme Court Ruling
The Court’s observations arose while adjudicating Tata Steel’s appeals concerning financial claims against Bhushan Steel Limited, a company it acquired through an approved resolution plan. Prior to the insolvency proceedings, Varsha had filed a lawsuit against Bhushan Steel for ₹38.89 lakh, and Masyc Projects initiated six arbitrations over supplied goods, submitting claims of ₹34.27 lakh and ₹31.30 crore, respectively. Due to the pending nature of these disputes, the resolution professional admitted both claims at a nominal value of ₹1 each.
NCLT and Subsequent Legal Developments
In May 2018, the National Company Law Tribunal (NCLT) sanctioned Tata Steel’s resolution plan, which allocated up to ₹1,200 crore for operational creditors, with ₹1,000 crore reserved for critical creditors and ₹200 crore for others. The Bombay High Court had previously allowed Varsha’s suit to proceed, and an arbitrator had refused to terminate proceedings involving Masyc.
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The Supreme Court, however, overturned these decisions, ruling that all civil suits and arbitration proceedings that had not resulted in determinable and quantifiable claims by the time the resolution plan was approved were to be extinguished. The Court clarified, “All legal proceedings, including arbitration and civil suits which had not culminated in determinable, quantifiable claims by the date of approval of the Resolution Plan by the NCLT stand abated, extinguished, waived or withdrawn.”
Legal Representation
During the proceedings, Tata Steel was represented by Senior Advocate Ramji Srinivasan, along with Advocates Shashank Gautam, Arvind Thapliyal, Siddharth Pandey, Daksh Jain, Arjun Bhatia, Shefali Munde, and Kunal Chatterji. Varsha was represented by Advocates Ajay Maheshwari, Garvesh Kabra, Pooja Kabra, Nikita Kabra Jaju, and Ankur Agnihotri. Masyc Projects was represented by Senior Advocate Neeraj Kishan Kaul, along with Advocates Manjeet Chawla, Jyoti, Yashvardhan, Devesh Mohan, Gyanendra Shukla, Pranav Das, and Varun Tyagi.
