The basic foundation on which the Insolvency and Bankruptcy Code 2016 (IBC) is laid, is that of a default by a Corporate Entity in it’s payment to any Creditor. This could be any creditor, be it a Loan providing Bank / NBFC or any Goods and Services Creditor. Thus if a Corporate Debtor (CD) defaults in it’s payment to any of it’s creditors then that creditor may choose to initiate IBC proceedings against the said CD.
Thus till this point in time there is no difference in the status of a creditor providing Loan / Debt referred to as a Financial Creditor (FC) or a creditor providing Goods and Services referred to as Operational Creditor (OC). FC can file an Application u/s 7 of IBC for initiation of proceedings under the Insolvency and Bankruptcy Code. It is not required to serve any prior notice to the CD for initiating the IBC proceedings.
While an Operational Creditor is required to serve a notice u/s 8 of IDC to CD & if not responded in 10 days, the OC can initiate IBC proceedings under sec 9 of IBC. So far, except for a minor procedural difference, FC and OC are treated at par by Insolvency and Bankruptcy Code.
But once the application is admitted, OCs practically take a back seat. Committee of Creditors (CoC) formed under the Insolvency and Bankruptcy Code can be considered as one of the whole Resolution process. It’s the CoC who has been entrusted the responsibility of approving a Resolution Plan of a CD, which would ensure a fair repayment to all it’s creditors and the business continuity of the CD.
This CoC predominantly consists of only FCs. In a few exceptional cases it could consists of Operational Creditor or their representation as a class of creditor. But in most of the cases it’s just FCs in the CoC. Thus an OC who initiates a case under IBC, would not find place in the CoC. This discourages an OC to initiate IBC proceedings.
While the stakes of FCs, in a CD, are generally higher as compared to OCs, but the exposure in a CD could be as high as above 90% of the OC’s individual total outstanding to all of it’s debtors. Thus if the resolution plan doesn’t pay off the Operational Creditor well, it may lead to insolvency of that OC.
Financial Creditors generally may tend to protect their own interest to the maximum & in the bargain provide for payment of only the minimum value to the OCs ie the Liquidation Value of the Operation Creditor liability. Since OCs have no say in the CoC they by default are made to accept such arrangements.
Sometimes the OC is even unable to recover the costs incurred by it for initiating the IBC process eg the legal fees, the IRP fees paid for the 1st month of the CIRP process, etc. In such a case the OC hurts itself by initiating the IBC process.
Hence it’s strongly felt that the Operational Creditor should have better representation in the CoC and should also have voting rights so that they are able to protect their own outstandings.
Even in a Liquidation scenario, the outstanding of Unsecured FC takes precedence over OC dues. Thus Operational Creditors have treated a level below the FC across the IBC law.
Operational Creditor should have more stakes in IBC and A Law which treats FC & OC at par for initiating a process, should ideally treat them at par throughout and till the closure of that process !!!
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