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(x) Financial Creditors in whose favour guarantees were executed, as their total claim stands satisfied to the extent of the guarantee, cannot re-agitate such claims as against the principal borrower.

6. We have heard detailed arguments made by Shri Gopal Subramanium and Shri Rakesh Dwivedi, learned senior counsel, on behalf of the Committee of Creditors of Essar Steel India Limited. They have argued that the provisions of the Code provide for a broad classification of creditors as financial creditors and operational creditors on the basis of the nature of the transaction between creditors and a corporate debtor. They have further argued that the Code does not mandate identical treatment of differently situated creditors either inter se within financial creditors, who may be secured or unsecured, and/or financial creditors vis-a-vis operational creditors. The Code only posits equitable treatment of different classes of creditors recognising that different classes deserve differential treatment. According to them, financial creditors as a class have a superior status as against operational creditors, the same being the case with secured creditors vis-a-vis unsecured creditors. For this purpose, they relied upon certain provisions of the Code. They further argued that the general law of the land as contained in Section 48 of the Transfer of the Property Act, 1882 and Section 77 of the Companies Act, 2013 would not have been taken away sub-silentio by the Code and have relied upon a large number of authorities for this purpose. They also referred to and relied upon the UNCITRAL Legislative Guide on Insolvency Law (hereinafter referred to as the “UNCITRAL Legislative Guide”), which was referred to by this Court in Swiss Ribbons Private Limited v. Union of India (2019) 4 SCC 17, and upon a report by the International Monetary Fund titled “Orderly and Effective Insolvency Procedures – Key Issues”. They also referred to and relied upon judgments under Article 14 of the Constitution of India which highlight the fact that classification is permissible so as to differentiate persons who are unequal, who cannot then be treated equally. They also argued, relying strongly upon the IMF paper on “Development of Standards for Security Interest” by Pascale De Boeck and Thomas Laryea, in addition to several expert reports, that classification of creditors based on the nature of the debt and/or security interest is a sine qua non for any Insolvency Code. They argued that if secured financial creditors are to be treated at par with unsecured creditors, such secured creditors would rather vote for liquidation rather than Corporate Resolution, contrary to the main objective sought to be achieved by the Code. They then argued that the health of the financial sector is critical for the overall health and growth of the economy, which would otherwise be subverted, if the impugned judgment were to be given effect. They relied strongly upon paragraphs 27 and 28 of Swiss Ribbons (supra), in particular, which differentiated between secured and unsecured creditors, most financial creditors being secured creditors and most operational creditors being unsecured. They also argued that the law laid down in K. Sashidhar v. Indian Overseas Bank 2019 SCCOnline SC 257, had made it clear that there is a judicial hands-off when it comes to the commercial wisdom of the Committee of Creditors, which has been directly infracted by the impugned judgment, which has held that the Committee of Creditors has nothing to do with the distribution of amounts which are infused by the resolution applicant for payment of the corporate debtor’s erstwhile debts. They relied heavily upon the Bankruptcy Law Reforms Committee Report, 2015 (hereinafter referred to as the “BLRC Report”) to buttress this submission, as well as the UNCITRAL Legislative Guide. They then submitted that a resolution plan is a consent-based plan proposed by the resolution applicant for a corporate debtor. The counterparty to such a plan is the Committee of Creditors, which is required to give a minimum consent of 66% voting share, which consent then becomes the basis for the Adjudicating Authority to approve a resolution plan for the corporate debtor. Once approved by the Adjudicating Authority, such plan becomes binding on all stakeholders as is mentioned by Section 31 of the Code. Therefore, any modification, as has been done by the NCLAT, of such plan is illegal. They then argued that the Committee of Creditors has both the power and the jurisdiction to deal with all commercial aspects of a resolution plan, including distribution of proceeds under such plan, and also referred to and relied upon the recent amendments made to Section 30 of the Code. They stated that the ArcelorMittal plan, as amended, looked after all stakeholders including operational creditors, and stated that a staggering amount of INR 55,000 crores qua operational creditors was paid during the 600 odd days of CIRP being carried out, operational creditors whose claims were above INR 1 crore, now being paid approximately 20% of their admitted dues. They also highlighted the fact that the secured creditors have lost about INR 17,000 crores of interest in the last three years due to the account of the corporate debtor having been classified as NPA. They then argued that the setting up of a sub- committee by the Committee of Creditors is permissible under the Code, and referred to certain judgments to buttress this proposition. They further argued that no decision-making power was delegated to the sub-committee, nor did the sub-committee at any time decide or even recommend on distribution of amounts. They then argued that the NCLAT admitted various rejected/disputed/estimated claims worth INR 13,767 crores, which was more than the amount originally claimed by operational creditors. Various instances of non-application of mind were pointed out by which claims worth INR 11,278, which were not yet crystallized, were admitted by the NCLAT for payment, and various examples of double payment were also given. It was also argued that the NCLAT erroneously permitted several disputed claims to be raised outside the provisions of the Code after approval of the resolution plan, by referring to and relying upon Section 60(6) of the Code, which merely saved limitation for barred claims. They then argued that extinguishment of the right of creditors against individual guarantees extended by the promoters/promoter group of the corporate debtor was wholly illegal being contrary to several judgments of this Court and contrary to the terms of the guarantees themselves. They further argued that the profits that were made during the CIRP can obviously not be used for payment of the debts of the corporate debtor, as has been ordered by the NCLAT. Ultimately, according to the learned counsel, the impugned NCLAT judgment deserves to be set aside because it has curtailed the authority of the Committee of Creditors; expanded the jurisdiction of the Adjudicating Authority as well as the NCLAT beyond the bounds contained in the Code; and has transgressed the most basic tenet of the Committee of Creditors’ commercial wisdom being reflected by an over 66% majority vote, which has been nullified by the NCLAT by completely modifying and substituting the resolution plan approved by the Committee of Creditors.

3).” (emphasis supplied)

46. This is the reason why Regulation 38(1A) speaks of a resolution plan including a statement as to how it has dealt with the interests of all stakeholders, including operational creditors of the corporate debtor. Regulation 38(1) also states that the amount due to operational creditors under a resolution plan shall be given priority in payment over financial creditors. If nothing is to be paid to operational creditors, the minimum, being liquidation value - which in most cases would amount to nil after secured creditors have been paid - would certainly not balance the interest of all stakeholders or maximise the value of assets of a corporate debtor if it becomes impossible to continue running its business as a going concern. Thus, it is clear that when the Committee of Creditors exercises its commercial wisdom to arrive at a business decision to revive the corporate debtor, it must necessarily take into account these key features of the Code before it arrives at a commercial decision to pay off the dues of financial and operational creditors. There is no doubt whatsoever that the ultimate discretion of what to pay and how much to pay each class or sub- class of creditors is with the Committee of Creditors, but, the decision of such Committee must reflect the fact that it has taken into account maximising the value of the assets of the corporate debtor and the fact that it has adequately balanced the interests of all stakeholders including operational creditors. This being the case, judicial review of the Adjudicating Authority that the resolution plan as approved by the Committee of Creditors has met the requirements referred to in Section 30(2) would include judicial review that is mentioned in Section 30(2)(e), as the provisions of the Code are also provisions of law for the time being in force. Thus, while the Adjudicating Authority cannot interfere on merits with the commercial decision taken by the Committee of Creditors, the limited judicial review available is to see that the Committee of Creditors has taken into account the fact that the corporate debtor needs to keep going as a going concern during the insolvency resolution process; that it needs to maximise the value of its assets; and that the interests of all stakeholders including operational creditors has been taken care of. If the Adjudicating Authority finds, on a given set of facts, that the aforesaid parameters have not been kept in view, it may send a resolution plan back to the Committee of Creditors to re-submit such plan after satisfying the aforesaid parameters. The reasons given by the Committee of Creditors while approving a resolution plan may thus be looked at by the Adjudicating Authority only from this point of view, and once it is satisfied that the Committee of Creditors has paid attention to these key features, it must then pass the resolution plan, other things being equal.

VII. The Code must ensure clarity of priority, and that the rights of all stakeholders are upheld in resolving bankruptcy.

12. The law must clearly lay out the priority of distributions in bankruptcy to all stakeholders. The priority must be designed so as to incentivise all stakeholders to participate in the cycle of building enterprises with confidence.

13. While the law must incentivise collective action in resolving bankruptcy, there must be a greater flexibility to allow individual action in resolution and recovery during  bankruptcy compared with the phase of insolvency resolution.” (emphasis supplied)

 “6. The Resolution Plan includes a statement under regulation 38(1A) of the CIRP Regulations as to how it has dealt with the interests of all stakeholders in compliance with the Code and regulations made thereunder.

7. The amounts provided for the stakeholders under the Resolution Plan is as under:

(Amount in Rs. Lakh) Sl. Category of Amount Amount Amount Amount No. Stakeholder Claimed Admitted Provided Provided under the to the Plan Amount Claimed (%) 1 Dissenting Secured Financial Creditors 2 Other Secured Financial Creditors 3 Dissenting Unsecured Financial Creditors 4 Other Unsecured Financial Creditors 5 Operational Creditors Government Workmen Employees … 4 Other Debts and Dues Total Quite clearly, secured and unsecured financial creditors are differentiated when it comes to amounts to be paid under a resolution plan, together with what dissenting secured or unsecured financial creditors are to be paid. And, most importantly, operational creditors are separately viewed from these secured and unsecured financial creditors in S.No.5 of paragraph 7 of statutory Form H. Thus, it can be seen that the Code and the Regulations, read as a whole, together with the observations of expert bodies and this Court’s judgment, all lead to the conclusion that the equality principle cannot be stretched to treating unequals equally, as that will destroy the very objective of the Code - to resolve stressed assets. Equitable treatment is to be accorded to each creditor depending upon the class to which it belongs: secured or unsecured, financial or operational.