Supreme Court Recommends IBC Amendment To Protect MSMEs, Says Small Operational Creditors Need Fairer Repayment Mechanism

While reaffirming the "clean slate" principle under the Insolvency and Bankruptcy Code (IBC), the Supreme Court has called upon the Law Commission and the Legislature to examine amendments to the insolvency framework to better protect Micro, Small and Medium Enterprises (MSMEs) and other small operational creditors, observing that they are significantly disadvantaged under the existing repayment structure.

A Bench of Justice Manoj Misra and Justice Manmohan made the recommendation in a judgment allowing Tata Steel's appeals and holding that operational creditors whose claims had not crystallised before approval of a resolution plan cannot continue civil suits or arbitration proceedings thereafter. The Court held that once a resolution plan is approved under Section 31 of the IBC, all claims not forming part of the plan stand extinguished, enabling the successful resolution applicant to take over the corporate debtor on a "clean slate."

However, before concluding the judgment, the Court flagged the adverse consequences of the present IBC framework on small operational creditors.

"The present cases underscore the impact of the Code on small operational creditors such as MSMEs," the Court observed, noting that although the IBC represented a significant improvement over the earlier Sick Industrial Companies (Special Provisions) Act, 1985, the present framework does not adequately account for the position of small operational creditors, including MSMEs and statutory local bodies, who are placed at the bottom of the repayment waterfall.

The Court observed that they are "significantly disenfranchised" under the existing statutory scheme.

“…this Court is nevertheless of the view that the Code does not adequately account for the position of small operational creditors, including MSMEs and statutory local bodies, who stand significantly disenfranchised under the present framework by being placed at the bottom of the repayment waterfall… Most such entities are ill-equipped to absorb even a minor financial setback and are therefore often compelled to adopt an aggressive and disruptive stance, as the facts of the present matters demonstrate. Since this issue lies within the legislative domain, this Court observes that the Law Commission and the Legislature may usefully examine the matter to ensure a fair and balanced repayment mechanism alongside an efficient insolvency regime.”, observed a bench of Justice Manoj Misra and Justice Manmohan.

The Court was hearing an appeal filed against the Bombay High Court's Nagpur Bench judgment, which had permitted the operational creditor to pursue a civil money recovery suit against the appellant, successful resolution applicant, notwithstanding the approval of the resolution plan.

While answering an issue of “whether the Operational Creditors may enforce claims for past dues by way of civil suit/arbitration, subsequent to approval of the Resolution Plan?”, the Court has observed that after the approval of the Resolution Plan, a money recovery suit for past dues cannot be filed, as all legal proceedings stand abated post-approval of the Resolution Plan.

“…this Court is of the opinion that all legal proceedings, including arbitration and civil suits which had not culminated in determinable, quantifiable claims by the date of approval of the Resolution Plan by the NCLT stand abated, extinguished, waived or withdrawn.”, the Court observed.

Although the Court upheld the finality of approved resolution plans, it also expressed concern over the position occupied by operational creditors in the insolvency process, particularly small businesses and MSMEs.

Therefore, the Court urged the Law Commission and Parliament to look into the concerns faced by the operational creditors so that they may receive due weightage and consideration in the IBC waterfall mechanism.

The appeal was allowed.

Cause Title: M/S TATA STEEL LTD. VERSUS VARSHA & ANR.

Citation : 2026 LiveLaw (SC) 694

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Appearance:

For Petitioner(s) : Mr. Ramji Srinivasan, Sr. Adv. Mr. Shashank Gautam, Adv. Mr. Arvind Thapliyal, Adv. Mr. Siddharth Pandey, Adv. Mr. Daksh Jain, Adv. Mr. Arjun Bhatia, Adv. Ms. Shefali Munde, Adv. Mr. Kunal Chatterji, AOR

For Respondent(s) : Mr. Ajay Maheshwari, Adv. Mr. Garvesh Kabra, AOR Mrs. Pooja Kabra, Adv. Mrs. Nikita Kabra Jaju, Adv. Mr. Ankur Agnihotri, Adv. Mr. Neeraj Kishan Kaul, Sr. Adv. Ms. Manjeet Chawla, AOR Ms. Jyoti, Adv. Mr. Yashvardhan, Adv. Mr. Devesh Mohan, Adv. Mr. Gyanendra Shukla, Adv. Mr. Pranav Das, Adv. Mr. Varun Tyagi, Adv.