The Supreme Court has held that pending civil suits and arbitration proceedings relating to pre-insolvency claims cannot continue once a resolution plan has been approved by the National Company Law Tribunal (NCLT), unless such claims have crystallised and form part of the approved plan.
The bench of Justices Manmohan and Manoj Misra set aside the Bombay High Court’s orders that had permitted an operational creditor’s recovery suit to continue despite approval of the company’s resolution plan. The Court also dismissed ongoing arbitration proceedings initiated by another operational creditor.
The controversy arose from claims made by two operational creditors—Varsha and Masyc Projects Pvt. Ltd.—against Bhushan Steel Ltd. before the commencement of the Corporate Insolvency Resolution Process (CIRP). Varsha had filed a civil recovery suit seeking approximately ₹38.89 lakh with interest, while Masyc had initiated multiple arbitration proceedings relating to supplies made to the company.
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After CIRP commenced, both creditors submitted their claims before the Resolution Professional. Since their claims were disputed and pending adjudication before various forums, they were admitted at a notional value of ₹1 each in the list of creditors. Tata Steel subsequently submitted and secured approval of its resolution plan for Bhushan Steel, under which operational creditors were provided a settlement corpus of ₹1,200 crore even though the liquidation value available to them was nil.
Following approval of the resolution plan by the NCLT in May 2018, Tata Steel sought dismissal of the pending civil suit and arbitration proceedings, contending that all pre-resolution claims stood extinguished. The trial court and the Bombay High Court rejected this contention, leading to the present appeals before the Supreme Court.
The Supreme Court reiterated that one of the foundational objectives of the IBC is to enable the successful resolution applicant to take over the corporate debtor free from uncertain and unresolved liabilities. Referring to earlier landmark decisions including Essar Steel and Ghanshyam Mishra, the Court observed that all claims must be submitted and dealt with during the insolvency resolution process so that the successful resolution applicant knows with certainty the liabilities it is assuming.
The Bench held that permitting unresolved litigation to continue after approval of the resolution plan would defeat the very objective of the IBC by exposing the successful resolution applicant to unforeseen liabilities years after taking over the company.
Rejecting the arguments of the operational creditors, the Court held that the Final List of Operational Creditors prepared during CIRP had attained finality and was never successfully challenged.
The Court observed that although the interim list had recorded that certain claims were subject to pending adjudication, the final list merely verified such disputed claims at a quantified value of ₹1 each. Consequently, the Court rejected the contention that assigning a notional value of ₹1 was intended to preserve the full claims for future adjudication.
According to the Court, the deletion of the earlier note in the final list demonstrated that the claims stood quantified at ₹1 and not merely kept alive pending litigation.
A central issue before the Court was whether Tata Steel’s resolution plan carved out an exception permitting pending civil suits and arbitration proceedings to continue.
After examining the plan as a whole, the Bench held that no such exception existed. It found that the plan expressly provided for extinguishment, withdrawal and abatement of all legal proceedings concerning pre-resolution claims except to the limited extent of amounts payable under the operational creditors’ settlement mechanism.
The Court ruled that only crystallised and quantified claims existing as on the effective date of the resolution plan could participate in the pro-rata distribution contemplated under the plan.
The Bench clarified that while Tata Steel voluntarily earmarked ₹1,200 crore for operational creditors despite having no legal obligation to do so because of nil liquidation value, only ₹200 crore was available for general operational creditors on a pro-rata basis.
Importantly, the Court held that this pool was intended only for claims that had crystallised and stood approved during the insolvency process. Allowing subsequently determined claims to participate would upset the final distribution mechanism contemplated by the approved resolution plan.
The operational creditor had argued that Tata Steel manipulated the resolution plan by altering the treatment of disputed claims and misleading the Resolution Professional and NCLT.
The Supreme Court rejected these allegations, noting that no proceedings had ever been initiated before the NCLT seeking recall of the approval order on grounds of fraud. In the absence of such proceedings, the Court held that allegations of manipulation could not be entertained in the present appeals.
The intervening operational creditor also proposed a “face value reservation mechanism” under which funds corresponding to disputed claims should have been kept aside until adjudication concluded.
The Supreme Court declined to accept this argument, holding that neither the resolution plan nor the IBC contemplated such a mechanism. It also rejected the application of the doctrine of contra proferentem, observing that there was no ambiguity in the resolution plan warranting such interpretative principles.
While deciding in favour of Tata Steel, the Supreme Court made important observations regarding the position of small operational creditors under the IBC framework.
The Bench noted that although the distinction between financial and operational creditors has been judicially upheld, the present statutory framework places small operational creditors—including MSMEs and local statutory bodies—at a significant disadvantage by placing them at the bottom of the repayment waterfall.
Observing that such entities are often unable to withstand even minor financial losses, the Court suggested that the Law Commission and the Legislature may examine whether reforms are required to provide a fairer repayment mechanism while preserving the efficiency of the insolvency regime.
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