IBC does not adequately account for interests of MSMEs, small operational creditors: Supreme Court

The Insolvency and Bankruptcy Code (IBC) does not adequately account for the interests of small operational creditors, including Micro, Small and Medium Enterprises (MSMEs), the Supreme Court opined recently [Tata Steel Limited v. Varsha].

A Bench of Justices Manoj Misra and Manmohan said that such creditors stand significantly disenfranchised under the present insolvency framework.

“The Code does not adequately account for the position of small operational creditors, including MSMEs and statutory local bodies, who stand significantly disenfranchised under the present framework by being placed at the bottom of the repayment waterfall,” the Court observed.

The Court said that under the IBC, small operational creditors are generally not equipped to absorb even minor financial losses.

“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."

Since the issue falls within the legislative domain, the Court suggested that the Law Commission and parliament examine it to ensure a fair and balanced repayment mechanism while preserving an efficient insolvency regime.

The observations were made in a judgment allowing Tata Steel’s appeals concerning claims against Bhushan Steel Limited, which the former took over under an approved resolution plan.

Before insolvency proceedings, Varsha sued Bhushan Steel for ₹38.89 lakh, while Masyc Projects commenced 6 arbitrations over supplied goods. They later submitted claims of ₹34.27 lakh and ₹31.30 crore respectively. Since the disputes remained pending, the resolution professional admitted both claims at ₹1 each.

In May 2018, the National Company Law Tribunal (NCLT) approved Tata Steel’s resolution plan, which allocated up to ₹1,200 crore for operational creditors. Of this, ₹1,000 crore was earmarked for critical creditors and ₹200 crore for others. The Bombay High Court allowed Varsha’s suit to continue, while an arbitrator refused to terminate Masyc’s proceedings.

The Supreme Court overturned these decisions. It held that all civil suits and arbitration proceedings that had not produced determinable and quantifiable claims by the time the resolution plan was approved stood extinguished.

“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,” the Court ruled.

It added that assigning a value of ₹1 to the disputed claims did not keep them alive until the civil or arbitral proceedings concluded. The final list of creditors had quantified the two claims at ₹1 each and was never successfully challenged.

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.

[Read Judgment]