NCLAT Validates Differential Treatment of Operational Creditors in CIRP for Commercial Viability

Prefatory Note

This judgment was delivered by the National Company Law Appellate Tribunal, New Delhi (‘NCLAT’) in NCC Ltd. v. Golden Jubilee Hotels (P.) Ltd.[i], addressed the challenge mounted by various operational creditors (‘OCs’) against an approved resolution plan (‘Plan’) under the Insolvency and Bankruptcy Code, 2016 (‘IBC’). The principal grievance was that the Plan treated certain OCs, specifically, government entities such as YATCL and the Society (collectively referred to as the ‘Government of Telangana’ or ‘GoT’), preferentially, paying them in full, while extending no payment to other OCs.

The NCLAT was called upon to examine whether such differential treatment within the same class of creditors was permissible under the IBC, and whether the categorisation of ‘special operational creditors’ could be legally sustained. The ruling clarifies the limits of judicial review over the commercial wisdom of the committee of creditors (‘CoC’) and the practical accommodation of commercial realities within the IBC framework.

Facts of the Case

• Golden Jubilee Hotels (P.) Ltd., the corporate debtor (‘CD’), was admitted into the corporate insolvency resolution process (CIRP) pursuant to proceedings initiated under s.7 of the IBC. The CD had constructed and operated a five-star hotel under the brand name ‘Trident’ on land leased from YATCL and the Society, both government-controlled entities in Telangana. Pursuant to the public announcement, claims were invited, and a CoC was formed.

• Subsequently, the Plan submitted by BREP Asia II Indian Holding Co. II (NQ) PTE Ltd. was approved by the CoC with a voting share of 68.26% and sanctioned by the National Company Law Tribunal, Hyderabad (NCLT) through an order dated 07.02.2020.

• The appellants (NCC Ltd., Consolidated Engineering Co., Infinity Interiors Pvt. Ltd., and Ahuja Furnishers Pvt. Ltd.) were OCs who had supplied various services such as interior works, construction, and furniture. They challenged the Plan on the grounds that it unfairly discriminated among OCs, granting full payment to YATCL and the Society (collectively referred to as ‘special operational creditors’) while assigning zero payment to other OCs. They argued that such a distinction was not recognised under the IBC, and that reg. 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 mandated fair and equitable treatment among similarly situated creditors.

• The appellants also raised subsidiary issues regarding:

(i) the legitimacy of conditional clauses in the Plan;

(ii) whether Micro, Small and Medium Enterprises (MSME) registration entitles OCs to preferential treatment;  and

(iii) the post-CIRP arbitral award, which, according to the appellants, indicated that the GoT’s claims were overstated and that any surplus funds should be redistributed.

Decision of the NCLAT

• The NCLAT dismissed the appeals and upheld the Plan as approved by the CoC and sanctioned by the NCLT. On the primary issue of differential treatment among OCs, the NCLAT held that the IBC permits such differential treatment, provided it complies with the minimum threshold of liquidation value under s.30(2)(b) read with s.53 of the IBC. Since the liquidation value payable to all OCs, including the appellants, was nil, the Plan’s allocation of zero payment to them did not violate the IBC.

• While the NCLAT acknowledged that the categorisation of YATCL and the Society as ‘special operational creditors’ had no statutory basis, it accepted the explanation that this nomenclature was used merely as a convenient label to distinguish creditors whose continued engagement was vital to the viability of the corporate debtor.

• The GoT was the lessor of the hotel land and a party to development and management agreements essential for the hotel’s ongoing operations. In their commercial wisdom, the resolution applicant and the CoC deemed it imperative to ensure continuity of this lease and strategic alignment with the lessor, and hence allocated full payment to GoT’s claims while taking a higher haircut on financial creditors.

• The NCLAT emphasised that the commercial wisdom of the CoC is non-justiciable, and that the adjudicating authority’s role under s. 31 of the IBC is limited to verifying compliance with s.30(2) and not to question the merits of the CoC’s decision.

• It was observed that differential payments among OCs do not violate the principle of fairness, so long as the rationale is linked to business viability and the Plan meets the statutory floor of liquidation value.

• As for the claim regarding MSME status, the NCLAT reiterated that while the MSMED Act, 2006, provides certain protections to small enterprises, the IBC, being a later statute with a non-obstante clause under s.238, overrides any inconsistent provisions. The fact that a creditor is an MSME does not entitle it to priority under the CIRP unless specific protections are provided under s.240A or s.54A, which were not applicable in the present case.

• The NCLAT also rejected the plea that a post-CIRP arbitral award, which allegedly directed YATCL to pay money to the CD, warranted redistribution among OCs. It held that any post-approval monetary inflow belongs to the CD, and not to pre-resolution creditors, who are bound by the Plan under s.31. The NCLAT thus concluded that the approved Plan did not suffer from illegality, nor did it contravene any mandatory provisions of the IBC.

Our Analysis

The decision of the NCLAT is a well-reasoned affirmation of the centrality of the CoC’s commercial wisdom in CIRP. It reinforces the doctrine laid down by the Supreme Court in Essar Steel[ii] and Swiss Ribbons[iii] that the CoC’s assessment of viability and feasibility of a Plan, including its allocation of payments across stakeholder classes, is beyond judicial scrutiny, so long as minimum statutory safeguards are respected.

A key strength of the judgment lies in its pragmatic acceptance of commercial realities. The NCLAT recognised that certain OCs, such as those holding strategic assets or rights, may justifiably be treated differently. The GoT’s position as the lessor of the hotel land was crucial to the hotel’s survival, and the CoC’s decision to prioritise payments to such a creditor reflected a business imperative, not an instance of arbitrary discrimination.

While the NCLAT expressed concern over the use of a non-statutory label like ‘special operational creditor’, it clarified that such nomenclature does not, by itself, invalidate the Plan where the classification is functionally justified and the distribution satisfies liquidation value norms. This ensures that form does not triumph over substance, while retaining judicial sensitivity to IBC’s structural fairness.

On the question of conditionality, the NCLAT’s holding that certain precedent conditions tied to land lease transfer were essential for the Plan’s viability was both commercially and legally sound. It highlights that conditional Plans are permissible, provided they are not unreasonably vague and are subject to a defined timeline and clear operational objective.

The ruling affirms with clarity that MSME status does not create a privileged class within CIRP. The NCLAT rightly held that the IBC overrides the Micro, Small and Medium Enterprises Development Act, 2006, to the extent of inconsistency and that MSMEs, like all OCs, must conform to the IBC’s distribution waterfall unless express provisions dictate otherwise.

Lastly, the NCLAT’s rejection of the claim for redistribution of arbitral proceeds reaffirms the finality and binding nature of an approved Plan. It protects the certainty and sanctity of the resolution process from ex post challenges.

End Notes

[i] 2024 SCC OnLine NCLAT 2052 dated 11.12.2024.

[ii] Essar Steel India Ltd.Committee of Creditors v. Satish Kumar Gupta, (2020) 8 SCC 531.

[iii] Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors. Writ Petition (Civil) No. 99 of 2018.

Authored by Sanyam Aggarwal, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.