Supreme Court Upholds Creditor Rights in Avoidance Recoveries and Reinforces CoC's Commercial Primacy Under IBC
- REEDLAW
- 1 day ago
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In a landmark judgment, the Supreme Court upheld creditor rights in avoidance recoveries and reinforced the commercial primacy of the CoC under the IBC.
On 01-04-2025, the Supreme Court Bench of Justice Bela M. Trivedi and Justice Satish Chandra Sharma adjudicated multiple civil appeals arising from the insolvency resolution process and reaffirmed that recoveries from avoidance transactions under Section 66 of the IBC must benefit the creditors, not the Successful Resolution Applicant. The Court upheld the primacy of the Committee of Creditors' commercial wisdom while ensuring compliance with statutory mandates, thereby limiting judicial intervention in insolvency proceedings.
The Supreme Court adjudicated multiple civil appeals arising from the insolvency resolution process of Dewan Housing Finance Corporation Limited (DHFL), addressing challenges to the judgment of the National Company Law Appellate Tribunal (NCLAT) dated 27.01.2022. The appeals encompassed key issues such as the treatment of avoidance applications under Section 66 of the Insolvency and Bankruptcy Code, 2016 (IBC), the claims of fixed deposit holders, and the role of erstwhile promoters in the Committee of Creditors (CoC) meetings. The Court considered challenges from Piramal Capital and Housing Finance Limited, Union Bank of India, 63 Moons Technologies Limited, fixed deposit holders, provident fund trusts, and the erstwhile promoters of DHFL, among others.
The Supreme Court reaffirmed that once a resolution plan is approved under Section 31 of the IBC, it is binding on all stakeholders, including creditors and government authorities. The Court ruled that recoveries from avoidance transactions under Section 66 are meant for the benefit of creditors and not the successful resolution applicant (SRA). The judgment emphasized that the CoC's commercial wisdom is paramount but must be exercised within the statutory framework. The Court also addressed the contention of fixed deposit holders, ruling that Section 238 of the IBC overrides other regulatory statutes, including the Reserve Bank of India Act, 1934, and the National Housing Bank Act, 1987. It clarified that the CoC’s decision regarding distribution mechanisms for creditors, including FD holders, is beyond judicial review unless it contravenes the IBC’s provisions.
The Court relied on key precedents, including Venus Recruiters Private Limited v. Union of India and Others, REEDLAW 2020 Del 11556, which established that avoidance transaction recoveries benefit creditors rather than the corporate debtor post-resolution. It also cited Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others, REEDLAW 2019 SC 11505, which reaffirmed that judicial intervention is permissible only where a resolution plan contravenes statutory mandates. The judgment in Arcelormittal India Private Limited v. Satish Kumar Gupta and Others, REEDLAW 2018 SC 10541, was also referenced to highlight that the CoC's commercial wisdom is not subject to judicial review except in cases of non-compliance with Section 30(2) of the IBC.
The Supreme Court examined the regulatory framework governing non-banking financial companies (NBFCs), affirming the RBI’s power under Section 45-IE of the RBI Act, 1934, to supersede the board of an NBFC in public interest and to protect creditors. It held that neither the NHB Act nor the RBI Act mandates full repayment of deposits to FD holders, and that the CoC’s resolution plan approval, including the mechanism for FD holders, was within its commercial discretion. The Court found that the NCLAT had exceeded its jurisdiction under Section 61 by directing reconsideration of certain aspects of the resolution plan, particularly avoidance transaction recoveries, which are to be distributed among financial creditors as per the CoC’s decision.
The judgment reinforces the principle that judicial intervention in insolvency matters must be minimal, allowing the CoC to retain control over the resolution process within the statutory confines of the IBC. It upholds the primacy of an approved resolution plan, ensures that avoidance recoveries serve the interests of creditors, and clarifies that the overriding effect of the IBC precludes conflicting claims under other regulatory statutes. This ruling sets a significant precedent for future insolvency proceedings, reaffirming the IBC’s objective of ensuring corporate revival while safeguarding creditor interests.
Mr. Kapil Sibal, Mr. Maninder Singh, Senior Advocates and Mr. Jasmeet Singh, Advocate, represented the Appellant.
Mr. Nakul Diwan, Senior Advocate and Mr. Santosh Kumar Paul, Advocate, appeared for the Respondents.
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