There was a major steel manufacturing company called 'Tough Steel Industries Limited' ('Tough Steel' or 'the Company'). For many years, Tough Steel was a leading name in the steel industry, known for producing high-quali

In the Essar Steel case (Committee of Creditors of Essar Steel India Ltd. vs. Satish Kumar Gupta, 2019), the Supreme Court reinforced the legal framework under the Insolvency and Bankruptcy Code (IBC), which grants financial creditors greater voting rights compared to operational creditors. The Committee of Creditors (CoC), composed primarily of financial creditors, has the authority to approve or reject a resolution plan, which allows them to play a dominant role in the decision-making process. The Court held that the CoC's decision is binding, and it cannot be disregarded by other creditors, including operational creditors, who have a relatively minor role. Overturning the NCLAT Order, the Supreme Court held that the principle of "equality" could not be interpreted to mean that all creditors (irrespective of their security interest or their status as operational or financial creditor) should get equal recovery under a resolution plan. The Supreme Court further held that even within a class of secured financial creditors, differential treatment based on the value of security of such creditors would be permissible. The Supreme Court observed that if the security interest of the creditors was disregarded during the CIRP, many creditors would be incentivized to vote for liquidation rather than resolution. This would defeat the key objective of the IBC, i.e. to ensure resolution of the distressed asset. Further, any bankruptcy law which delays, weakens or de-prioritizes security on insolvency, would destroy the purpose of creation of security in the first place. The Supreme Court noted that financial creditors and operational creditors by virtue of their business relations with the corporate debtor can never be equally placed and that the IBC itself contemplates operational creditors as a separate class of creditors. However, the IBC provides for certain safeguards, such as priority in repayment to ensure the fair and equitable dealing of such operational creditors' rights. Therefore, the Supreme Court held that as long as the provisions of the IBC were complied with, the CoC could approve and even negotiate for a resolution plan which provided for differential payment to financial and operational creditors. Therefore, hierarchy is rooted in the IBC to ensure that those who have the most significant financial interest and exposure in a distressed company are the primary decision-makers. In the Tough Steel scenario, just like in Essar Steel, the financial creditors would have the majority of the say in approving the resolution plan, ensuring the process is controlled by those with the greatest financial stake in the outcome.