The Supreme Court has ruled that pending civil suits and arbitration proceedings concerning pre-insolvency operational claims cannot continue once a corporate resolution plan is approved, unless those claims have been crystallised and included in the final plan.
The decision, which reinforces the “clean slate” doctrine of the Insolvency and Bankruptcy Code (IBC), was delivered by a bench of Justices Manoj Misra and Manmohan. The ruling allowed appeals filed by Tata Steel Ltd, the successful resolution applicant for Bhushan Steel Ltd, and overturned Bombay High Court judgments that had permitted an operational creditor’s recovery suit to proceed after the resolution plan’s approval.
According to the judgment, written by Justice Manmohan, all legal proceedings—including arbitration and civil lawsuits—that had not resulted in quantifiable, determined claims by the date the National Company Law Tribunal (NCLT) approved the resolution plan are considered abated, extinguished, waived, or withdrawn. The court held that only claims crystallised by the effective date of May 18, 2018, are eligible for pro-rata payment.
Consequently, the court ruled that no amount exceeding Rupee One (Re 1) each is payable to the operational creditor Varsha and the intervenor Masyc Projects Pvt Ltd, whose respective civil and arbitral proceedings have been terminated.
The dispute originated from claims submitted by Varsha and Masyc during the insolvency resolution process of Bhushan Steel. Because their claims were disputed and subject to ongoing legal actions, the resolution professional admitted them at a nominal value of Re 1 each. The court noted that these claims were recorded at this notional value in the final list of creditors, which was never challenged before the resolution plan was approved and became binding.
Overriding Effect Of The Insolvency Code
The bench emphasized that the IBC overrides any conflicting legislation. Once a resolution plan receives approval under Section 31(1) of the code, all claims are frozen and become binding on all stakeholders, including the corporate debtor and its creditors.
The court reiterated prior rulings stating that all claims must be submitted to and decided by the resolution professional. This ensures that prospective resolution applicants know their exact financial obligations before taking over and running a distressed business. The bench added that the treatment of these claims is determined within the resolution plan approved by the Committee of Creditors, whose commercial decisions are non-justiciable.
Call For Legislative Reforms To Protect MSMEs
In a postscript to the judgment, the court addressed the financial hardships experienced by small operational creditors, particularly Micro, Small, and Medium Enterprises (MSMEs) and statutory local bodies, under the current insolvency framework.
While upholding the validity of the existing law, the bench observed that small creditors are positioned at the bottom of the repayment hierarchy, known as the waterfall, and often struggle to recover from the financial losses resulting from insolvency. The court noted that this lack of financial resilience often drives smaller entities to take disruptive or aggressive legal stances during insolvency proceedings.
To address these concerns, the bench suggested that the Law Commission and Parliament examine whether the IBC requires legislative reforms. The court noted that the legislature could investigate introducing a more equitable repayment mechanism for smaller creditors while preserving the efficiency of the insolvency resolution process.
