This article is written by Adv. Sohan Varghese Francis, Corporate & Civil lawyer and Founder of Juris Summit, a global legal consultancy helping startups, founders and businesses navigate complex laws with confidence. He holds 4+ years of experience in domestic practice and international collaborations. He specialises in structuring businesses, drafting airtight contracts, and ensuring cross-border compliance.   

To begin with

When we talk about corporate insolvency, the importance is generally given to large financial institutions as well as to the banks, whereas the small creditors are often neglected. The small creditors generally include vendors, suppliers or any service providers who at one time have significantly contributed to the operations and the growth of the business.

The Insolvency and Bankruptcy Code, 2016 (IBC), introduced creditor-driven insolvency resolution, aiming for faster resolutions and value maximisation. Yet in practice, it has created a clear disparity. Financial creditors enjoy priority, and operational creditors, especially the small ones, are left with little to nothing in resolution plans.

This gap is not only seen in the bare act and in documents, but it is also visible in the courtrooms, as well as in the resolution plans. In the most recent case of Kalyani Transco vs. Bhushan Power and Steel Ltd. (2025), this issue is in the spotlight. Although the judgment which was given has followed a proper procedure of the law but then it also gave rise to an important question, i.e., has the insolvency system of India created a group of small creditors who are recognised by law, but in practice are left behind and overlooked?

While we delve into the facts of the Kalyani Transco case, let us revisit the IBC’s structure and compare India’s approach with global standards. And to introspect whether it is time to rethink the treatment of the smallest players in the resolution process?

Operational creditors and their ordeal -the legal landscape

Under the IBC, not all creditors are treated equally. The Code institutionalised a hierarchy that rewards size and financial clout. 

Operational creditors have certain rights available under IBC to representation and rights to appeal of this Corporate Insolvency Resolution Process. They can also initiate insolvency resolution u/s 8(1). But these provisions are not used and often fail to translate into real influence in resolution. 

The Creditor Hierarchy under the IBC

When we talk about creditor hierarchy under IBC, then at the top there are the financial creditors who are usually considered as NBFCs, banks and bondholders. Under Section 30(4) of the IBC, CoC have the power they approve or reject the resolution plans, and such practices are often referred to as “commercial wisdom.”  

Service providers, employees and suppliers are generally considered operational creditors. Operational creditors can file under Section 9 but generally lack CoC representation. Under Section 24(3)(c) of IBC, operational creditors are allowed to attend the meetings if their claims together make up more than 10% of the company’s total debt.

In the Swiss Ribbons Pvt. Ltd. v. Union of India (2019), the Supreme Court observed that, discriminating between financial and operational creditors under the IBC is constitutionally valid. The Court felt that financial creditors are in a better position to assess viability and restructuring proposals. 

The Supreme Court in Jaypee Infratech Ltd. v. Axis Bank Ltd. (2020) further reaffirmed this design by recognising that operational creditors are differently placed, and therefore their exclusion from decision-making cannot be faulted as unconstitutional, provided minimum protections under Section 30(2)(b) are met.

The legal disadvantage of small creditors

Despite being stakeholders in the operations of the debtor, the small creditors are faced with:

• No voting rights on resolution plans.
• Minimal recoveries, sometimes just pennies on the rupee.
• Communications on proceedings, if any, received late.
• No representation in the CoC, unless there are exceptional circumstances.

Section 24(4) IBC clarifies that while directors, partners, and representatives of operational creditors can attend meetings of the Committee of Creditors (CoC), they do not have the right to vote. Their presence is permitted, and they can participate in discussions, but the final decisions are made by the financial creditors who hold voting rights based on their financial debts

In Essar Steel, 2019, operational creditors with the claims of ₹4,976 crore were paid just ₹214 crore, about 4.3%  as against a 92% recovery paid to secured financial creditors. The Supreme Court went on to uphold the “commercial wisdom” of the CoC, which implies that once the legal thresholds are met, the courts have no business interfering.

The Court in Essar Steel also clarified that “fair and equitable treatment” under Section 30(2)(b) does not mean equality of outcome but only that operational creditors must receive at least the liquidation value due to them under Section 53. This principle has since been repeatedly applied, including in Kalyani Transco v. Bhushan Power & Steel Ltd. (2025), where the Supreme Court reiterated that operational creditors cannot demand parity with financial creditors so long as statutory minima are met.

This raises another question: Is “commercial wisdom” fast becoming a cloak to conceal inequity? Yet, it is often small suppliers that understand how the business runs on the ground, an experience that should be leveraged.

What happened in Kalyani Transco vs. BPSL (2025)?

There was dissatisfaction among the small players in the insolvency ecosystem in 2025. Kalyani Transco Private Ltd., a minor operational creditor, filed a petition against the resolution plan that was approved for Bhushan Power and Steel Ltd.

It was a direct appeal that the Apex Court was dealing with. It was from the NCLAT’s dismissal of Kalyani Transco’s objections. It wasn’t just paperwork or procedure anymore. The judges were willing to re-examine the meaning of “fair treatment” under the IBC, especially for the operational creditors.  

A brief overview of the case

Kalyani Transco had supplied engineering components to BPSL and claimed a small operational debt. The resolution plan was approved by the CoC, which offered negligible recovery, reportedly less than 1% of the claimed amount to Kalyani Transco, while sizable payouts were made to the secured financial creditors.

Kalyani Transco went to the NCLAT, arguing that the resolution plan was not fair and equitable within the purview of Section 30(2)(e) of IBC, which demands that the plan must be in compliance with legal provisions. Kalyani argued that even though the amount claimed might have been meagre, the claim needed to be respected in the process.

The Supreme Court, however, emphasised that while the IBC does not guarantee equal recovery, it does require non-discriminatory treatment. The Court highlighted that operational creditors cannot be reduced to “illusory” recoveries, even if their claims are comparatively small.

Key issues raised in the case

Was the resolution plan discriminatory?

The operational creditor alleged that the plan provided vastly disproportionate treatment between financial and operational creditors, violating the principles of equitable distribution and natural justice.

Does the “commercial wisdom” doctrine override fairness?

The CoC’s decision was shielded by the now-familiar judicial doctrine of non-interference, that courts should not question the financial wisdom of the creditors. But should this doctrine apply even when the result seems legally sound yet ethically questionable? Since the CoC’s decision was protected by the doctrine of commercial wisdom (as reaffirmed in K. Sashidhar v. Indian Overseas Bank, (2019), the question arose: Should courts step in where outcomes appear legally sound but substantively inequitable?

What is “fair and equitable” under the IBC?

The court was invited to reconsider whether procedural compliance (like giving a creditor “something”) is enough, or whether substance and fairness should guide the outcome.

What were the key findings?

The Kalyani Transco vs. BPSL (2025) decision was not a legal blockbuster, but its subtle affirmations of the status quo have deep implications. While the judgment was consistent with past rulings, it also underlined a growing discontent: that predictability in law is not always the same as fairness in justice.

Courts reaffirmed the supremacy of commercial wisdom

The tribunal reiterated that it shall not interfere in the CoC decisions, unless the plan contravenes explicit provisions of the IBC or is patently arbitrary. Thus, the Supreme Court, in essence, treated the Essar Steel judgment as the touchstone precedent. 

The Court specifically observed that the mandate of Sections 30(4) and 31 of the IBC leaves no room for judicial substitution of CoC’s decision with what the court “thinks” is a better distribution. In doing so, it directly rejected Kalyani Transco’s plea that commercial wisdom must be subjected to a fairness review beyond legality.

Procedural compliance was deemed sufficient

The NCLAT maintained that merely differential treatment of creditors cannot be legally infringing, so long as operational creditors are provided with a payment that is not less than the liquidation value and the plan adheres to Section 53.

The court refused to impose substantive fairness standards on a process that is meant to be fast, predictable, and creditor-driven. It clarified that “procedural fairness” does not extend to questioning the rationale of CoC’s distribution model so long as the minimum legal floor is met. 

It refused to recognise a substantive right of operational creditors to demand parity with financial creditors.

“Fairness” under IBC remains procedural, not moral

The Court nodded silently to one great truth in the matter: the IBC has been primarily concerned with legality rather than equity. The resolution plan might have been a technically acceptable one for BPSL, but to Kalyani Transco, it was still a legal eviction from justice.

In fact, the bench underscored that fairness must be seen in the “systemic context” of speedy resolution and revival of the corporate debtor, not in the “individualised sense” of every creditor’s satisfaction. 

The “value maximisation” logic trumps equitable distribution

The court noted that the goal of the resolution process is value maximisation, not redistribution. 

It reaffirmed that “maximisation of value of assets” under Section 30(2)(b) is the guiding star of IBC, and redistribution of value to create substantive equality was never envisaged.

In rejecting Kalyani Transco’s claims, the Court maintained that operational creditors’ remedy lies in contract law or arbitration, not in stretching insolvency principles beyond their legislative design.

Critical reflections on the Kalyani Transco ruling

Legal judgments often walk a tightrope between doctrine and justice. In Kalyani Transco vs. BPSL, the rope was steady, the doctrine held. But from where small creditors stood, it wasn’t hard to feel like they had fallen off the edge. This section unpacks the deeper implications of the ruling, not just in black-letter law, but in how the insolvency ecosystem is evolving and for whom it’s evolving, as most operational creditors are unsecured.

Legally sound, morally lopsided?

The judgment followed procedure and precedent but left small creditors like Kalyani Transco with negligible recoveries despite delivering goods or services as per the rules. 

In light of the Supreme Court’s observation in this case that the differential treatment between financial and operational creditors was not unconstitutional per se, as the legislative intent of the IBC itself was to prioritise resolution over liquidation. Yet, the absence of safeguards for small creditors raises questions about whether the constitutional principle of equality before the law is being indirectly diluted.

The commercial wisdom doctrine: efficient or evasive?

The situation was stuck in its familiar position. The Court cannot interfere with the actual decision of the CoC, but can review if the process was followed. Still, no legal requirement exists that can force the CoC to record and address the concerns of operational creditors. At best, these things are merely acknowledged on paper, and nothing more. 

And this is the actual problem. At this point, the doctrine of commercial wisdom starts looking less like wisdom and more like exclusion. 

A two-tier justice system under the IBC?

The IBC operates with a built-in hierarchy of justice:

• Tier 1: Secured financial creditors — recoveries and influence.
• Tier 2: Operational creditors — minimal returns, no say.

The Kalyani Transco ruling arguably cements this two-tier structure by reiterating that operational creditors cannot claim parity with financial creditors in distributions under a resolution plan. While this provides certainty for lenders and investors, it entrenches a systemic imbalance that leaves suppliers, employees, and MSMEs perennially vulnerable. Unless legislative amendments create a more balanced recovery framework, the IBC risks alienating precisely those stakeholders it sought to protect from the earlier regime of endless litigation and non-recovery.

Rethinking equity in resolution

After analysing the Kalyani Transco ruling and its implications, the elephant in the courtroom is clear: the IBC may be efficient, but is it equitable? 

Should the IBC introduce a minimum payout threshold?

Small creditors could be guaranteed a modest minimum recovery, similar to priority sector norms in banking.

Such a floor could be modest, say 5% or even 1% of admitted claims, but it would signal a systemic commitment to fairness and reduce litigation by aggrieved claimants.

Should small creditors be given partial voting rights?

Until now, no operational creditor has had a say in the committee unless they form 10% or more of the total debt is a rare situation. Hence, there is an inherent representation deficit.

Assigning partial or fractional voting rights according to the size of claims (let’s say a combined 10% voting weight to operational creditors) will perhaps go a long way in balancing fast and efficient resolutions with a basic sense of inclusion.

What can India learn from other countries?

To balance the scale, the legal system in many parts of the world sometimes tries subtly and sometimes directly. Starting from the UK, for instance, trade creditors are actually permitted representation through different committees. Taking another example, in the US, unsecured creditors can participate in the creditors committee, and can participate and negotiate restructuring terms. In fact, Singapore also permits representation of small creditors.

Comparing this with India, small creditors are recognised on paper. But in practice, their role is little more than symbolic. Their claims are recognised by the law, but when it comes to decision-making, they are sidelined. 

Final takeaway

In the case of Kalyani Trancso vs BPSL, the insolvency law was not changed, but they have spotlighted some important points, or we can say on some truths that everyone should know, such as that the law and the procedure are being followed, but then also the fairness is still missing. This case also shows how the gap is increasing between the strict legal procedure and the actual justice that is given under IBC.   

Now the question is whether the judgment that was given was correct and legally sound? So the answer to this question is yes, but not only that; this judgment also indirectly urges the urgent need to add corrective measures in the IBC, which is far more than the mechanical application. 

The system, which is present, gives more power to the financial creditors to make decisions, and on the other hand, the operational creditors are mostly neglected. The main question which have to be answered and focused on is whether the law only needs to focus on the efficiency part or is this high time to make things fairer for all those who do not have a voice in the process?

Frequently asked questions (FAQs)

1. Do small creditors have the right to challenge a resolution plan under the IBC?

Yes, but with limited success. Courts usually defer to the “commercial wisdom” of the CoC unless there’s a clear legal violation or fraud. 

2. Can Operational Creditors be included in the Committee of Creditors (CoC)?

No, Operational creditors cannot be included in the Committee of Creditors (CoC) under the IBC. But, if the combined dues of the operational creditors are 10% or more than that of the total debt, then they are allowed to attend the CoC meetings, but do not have any voting rights. 

3. What are the remedies available to the small creditors when they receive a negligible or zero payout? 

The small creditors should be paid at least the liquidation value, and this is also given under Section 30(2)(b) of IBC. On the other hand, if the due process is followed and all the statutory requirements are met, then the courts uphold such a resolution or plans even after the negligible payouts. 

4. Is it possible for the suppliers to refuse to deal with all those companies that are under the proceedings regarding insolvency?

Yes, the suppliers can decline or can refuse for any new transaction. However, according to  Section 14, which is related to the moratorium provision under the IBC, suppliers need to continue with the existing contracts.   

Reference

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