CoC has exclusive jurisdiction over resolution plan terms through commercial wisdom, NCLAT cannot review on equitable grounds

NCLAT Principal Bench rejected appellant's challenge to resolution plan approval. CoC allocated nil amount to appellant in approved resolution plan. Appellant claimed violation of waterfall mechanism under Section 53 of IBC. NCLAT held resolution plans cannot be approved unless minimum payment made to operational creditors and dissenting financial creditors per liquidation value under Section 53. However, CoC has exclusive jurisdiction over resolution plan terms through commercial wisdom. Adjudicating authority lacks equity-based jurisdiction and can only verify statutory compliance under Section 30(2). NCLAT cannot review CoC's commercial decisions on equitable grounds. Appeal dismissed as devoid of merit.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this matter are:

(i) Whether a related party creditor can be treated differently from other creditors in the approved Resolution Plan by the Committee of Creditors (CoC).

(ii) Whether the allocation of NIL payment to the Appellant, initially admitted as an unsecured financial creditor but subsequently declared a related party, is lawful and in accordance with the Insolvency and Bankruptcy Code, 2016 (the Code).

(iii) Whether the NIL payment allocation violates the waterfall mechanism under Section 53 of the Code, which prescribes the priority of payments in liquidation.

(iv) Whether the Adjudicating Authority was justified in approving the Resolution Plan despite noting apparent violations of the Code in the plan.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Treatment of Related Party Creditors in the Resolution Plan

Legal Framework and Precedents: Section 21 of the Code defines the role of the CoC, which exercises commercial wisdom in the CIRP and in approving the Resolution Plan. The Supreme Court in multiple decisions including the Rajagopalan case [(2021) 7 SCC 401] has held that differential treatment of related parties versus unrelated parties in a Resolution Plan is permissible and falls within the commercial wisdom of the CoC. The CoC's commercial decisions are non-justiciable except for compliance with statutory provisions.

Court's Reasoning and Application: The Tribunal observed that the Appellant was declared a related party by the Resolution Professional, a classification upheld by the Adjudicating Authority and this Tribunal. The Resolution Plan treated the Appellant as an unsecured financial creditor and allocated NIL payment accordingly, consistent with the CoC's commercial wisdom. The Tribunal noted that the Code permits differential treatment of creditors, including related parties, and that the Appellant's claim was addressed based on its classification rather than arbitrarily excluded.

Conclusion: The Tribunal held that related party creditors can be differentiated in treatment vis-`a-vis other creditors in the Resolution Plan, and such classification and treatment by the CoC is lawful and within its commercial discretion.

Issue (ii): Legality of NIL Allocation to the Appellant

Legal Framework and Precedents: Section 30(2)(b) of the Code mandates that a Resolution Plan must ensure that dissenting financial creditors receive at least the liquidation value as per Section 53. The Supreme Court in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta [(2020) 8 SCC 531] clarified that the commercial wisdom of the CoC governs distribution among creditors, and NIL payments are permissible to unsecured financial creditors if consistent with the Code. Further, judicial precedents including this Tribunal's decisions in S. Chandriah v. Sunil Kumar Agarwal and Yogeshwar Garg v. Mandeep Gujral have upheld NIL payments to certain classes of creditors under valid Resolution Plans.

Court's Reasoning and Application: The Tribunal noted that the Appellant, as an unsecured financial creditor and related party, was allocated NIL payment because the liquidation value was insufficient to satisfy secured creditors, who rank higher in priority. The Appellant's entitlement in liquidation would have been NIL under Section 53, and therefore, the Resolution Plan's NIL allocation did not violate the Code. The Tribunal further observed that the CoC's commercial wisdom, exercised transparently and without arbitrariness, governs such allocation decisions.

Treatment of Competing Arguments: The Appellant argued that NIL payment violated Section 30(2) and Section 53, and that operational creditors were being paid while it was not. The Tribunal rejected this, explaining that Section 53 applies primarily to liquidation scenarios and minimum payments to dissenting creditors, and does not preclude commercial decisions in Resolution Plans during CIRP. The Appellant's related party status and unsecured creditor classification justified the allocation.

Conclusion: NIL allocation to the Appellant was lawful, consistent with the Code, and within the CoC's commercial wisdom.

Issue (iii): Alleged Violation of Waterfall Mechanism under Section 53

Legal Framework and Precedents: Section 53 prescribes the priority of payments in liquidation, placing secured financial creditors above unsecured financial creditors and operational creditors. The Supreme Court in the Essar Steel case clarified that Section 53 sets minimum thresholds but does not rigidly bind the CoC's commercial decisions in Resolution Plans. The Code distinguishes between liquidation and resolution processes.

Court's Reasoning and Application: The Tribunal found that the Resolution Plan's allocation, including payments to operational creditors and NIL to unsecured financial creditors like the Appellant, did not violate the waterfall mechanism because Section 53 applies to liquidation and minimum payments to dissenting creditors, not to the commercial distribution in a Resolution Plan. The CoC's decision to pay operational creditors a minimal amount was a commercial decision to make the plan viable and implementable.

Conclusion: The Resolution Plan's distribution does not contravene Section 53, and the Appellant's claim of violation is legally untenable.

Issue (iv): Approval of Resolution Plan by Adjudicating Authority Despite Noted Violations

Legal Framework and Precedents: Section 30(2) and Section 31 of the Code require the Adjudicating Authority to approve a Resolution Plan only if it complies with the Code. However, the Supreme Court and this Tribunal have held that the Adjudicating Authority's role is limited to ensuring compliance with statutory provisions and not to interfere with the CoC's commercial wisdom. The Adjudicating Authority cannot direct allocation of specific amounts to creditors.

Court's Reasoning and Application: The Adjudicating Authority noted possible violation of Section 30(2) but approved the Resolution Plan subject to the CoC adopting a pragmatic approach to allocate a reasonable amount to the Appellant. The Tribunal held that this was within the Adjudicating Authority's jurisdiction and consistent with the Code, as the Adjudicating Authority cannot substitute its judgment for the CoC's commercial wisdom. The subsequent allocation of Rs. 10 lakhs to the Appellant by the CoC complied with the Adjudicating Authority's direction and addressed the grievance.

Conclusion: The Adjudicating Authority acted within its jurisdiction in approving the Resolution Plan despite noting concerns, and the Appellant's challenge to the approval is without merit.

3. SIGNIFICANT HOLDINGS

"The commercial wisdom of the Committee of Creditors is paramount and cannot be interfered with by the Adjudicating Authority or this Appellate Tribunal."

"The role of the Adjudicating Authority under Section 31 of the Code is to ensure that the Resolution Plan complies with the requirements of the Code, particularly Section 30(2), and not to assess the commercial decisions of the CoC."

"Differential treatment of related parties and unsecured financial creditors, including allocation of NIL payment, is permissible under the Code when consistent with the liquidation value and the commercial wisdom of the CoC."

"Section 53 of the Code prescribes the waterfall mechanism applicable primarily in liquidation and for minimum payments to dissenting creditors, but does not restrict the CoC's commercial discretion in distribution under a Resolution Plan."

"The Adjudicating Authority may approve a Resolution Plan subject to directions to the CoC to reconsider allocations, but cannot itself direct specific payments to creditors."

"The Appellant, as an unsecured financial creditor and related party, was lawfully allocated NIL payment in the Resolution Plan, consistent with the Code and the liquidation value, and the subsequent allocation of Rs. 10 lakhs by the CoC further addressed the grievance."

"Judicial interference in the commercial wisdom of the CoC is limited and not warranted absent non-compliance with statutory provisions."

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