Analysis of NCLAT Judgement in the case of NCC Ltd. v. Golden Jubilee Hotels Pvt. Ltd. and Ors.

The case of NCC Ltd. v. Golden Jubilee Hotels Pvt. Ltd. and Ors. deals with an important question under the Insolvency and Bankruptcy Code, 2016 (IBC): can certain creditors within the same category, like Operational Creditors, be treated differently during a company’s insolvency resolution process? The appeals in this case challenged the approved Resolution Plan of Golden Jubilee Hotels Pvt. Ltd., which gave preferential treatment to some creditors labeled as "Special Operational Creditors," while others in the same category received nothing.

This judgment reaffirms the principle that the CoC’s commercial wisdom is supreme and can justify different treatment among creditors if it serves the larger purpose of reviving the company. Through this case, the Tribunal provided clarity on how the rights of creditors are balanced with the goal of ensuring the sustainability of the corporate debtor.

This write-up breaks down the Tribunal's findings, the reasoning behind them, and the key takeaways from the case.

Background and Facts

The judgment concerns a cluster of appeals filed under Section 61(3) of the Insolvency and Bankruptcy Code, 2016 (IBC), against the order of the NCLT, Hyderabad, which approved the resolution plan of M/s Golden Jubilee Hotels Pvt. Ltd. (the "Corporate Debtor"). The resolution plan provided preferential treatment to certain creditors, creating a subclass of "Special Operational Creditors" within the Operational Creditors category. This treatment was challenged by various operational creditors, including NCC Ltd., on the grounds of discrimination and inconsistency with the IBC.

Issue 1: Subclassification of Operational Creditors

The National Company Law Appellate Tribunal (NCLAT) upheld the differential treatment provided to certain Operational Creditors, including the classification of "Special Operational Creditors," under the approved Resolution Plan. The Tribunal emphasized that such differential treatment was permissible under the Insolvency and Bankruptcy Code, 2016 (IBC), provided it was based on sound commercial rationale and aligned with the objectives of the Code.

The NCLAT dismissed the appeals filed by NCC Ltd. and other Operational Creditors, upholding the differential treatment and approving the Resolution Plan. It reaffirmed that such decisions fall squarely within the CoC's domain of commercial wisdom and do not warrant judicial interference. The Tribunal’s findings reinforced the principle that business exigencies and operational viability can justify differential treatment among creditors.

Issue 2: Differential Treatment

Relying on precedents such as Essar Steel India Ltd. v. Satish Kumar Gupta, the tribunal reiterated that differential treatment is permissible if it aligns with the commercial wisdom of the CoC. In this case, the financial viability of the Corporate Debtor and its continued operations justified full payment to the Special Operational Creditors, even if other Operational Creditors received no payout.

• "Although the term 'Special Operational Creditor' is not found in the Code, its usage here was merely for convenience and to reflect the critical role of the lessors in ensuring the Corporate Debtor’s operational viability." (Para 94.lxix)
• The classification was based on sound business rationale and was essential to securing the continued operations of the Corporate Debtor." (Para 94.lxviii)
• Case Law:

1. Pratap Technocrats (P) Ltd. v. Monitoring Committee of Reliance Infratel Ltd. (2021 -) "The differentiation within a class must serve a purpose tied to the feasibility and revival of the Corporate Debtor."
2. Sabari Realty Pvt. Ltd. v. Sivana Realty Pvt. Ltd. (2023) - "Differential treatment among creditors of the same class has been upheld where it aligns with the objectives of the IBC."
3. Greater Noida Industrial Development Authority v. Prabhjit Singh Soni and Anr. (2024) "Reasonable differentiation between creditors is permissible if it ensures the success of the resolution plan."

Issue 3: Judicial Review

The tribunal emphasized that the CoC's commercial decisions, including payment distribution under a resolution plan, are largely non-justiciable, except for ensuring compliance with Section 30(2) of the IBC. The tribunal declined to interfere with the CoC's decision, reaffirming its limited scope of judicial review.

Issue 4: MSMED Act

The tribunal ruled that the MSMED Act does not override the IBC due to the latter's overriding provision in Section 238. Protections under the MSMED Act do not extend to altering the priority or distribution framework under the IBC.

The tribunal clarified that any financial benefit accruing to the Corporate Debtor post-CIRP, including from arbitral awards, does not impact the resolution plan already approved. These benefits accrue to the Corporate Debtor under new management.

Outcome:

The Tribunal dismissed the appeals, upheld the Resolution Plan, and affirmed the CoC's commercial wisdom. It also suggested that the Insolvency and Bankruptcy Board of India (IBBI) explore mechanisms to ensure fairer treatment for Operational Creditors in future cases.

This judgment reinforces the principle that decisions made by the CoC are largely insulated from judicial review, provided they align with the IBC and its regulations. It underscores the importance of balancing creditor rights with the objective of corporate revival.