The Insolvency and Bankruptcy Code has come with extra ordinary developments to the laws related to insolvency and bankruptcy. As a result of that, India has recovered vast amount of debt from the default corporate debtors. Regardless of this success, these recovered proceedings of liquidation are not distributed the way the way that they should be. Why? It is because regardless of how “creditor friendly” this code is, a section of creditors are not given their due, and it is the operational creditors.
The Current Situation
According to the current way that the committee of creditors have been created, the operational creditors are not given a seat at the table. Therefore, such creditors don’t have much say as the resolution plan of the insolvency that requires the voting from the Committee to reach an effective decision. Not to say that they are complete excluded from the meetings of the committee, for if the collective dues of the operational creditors exceed 10%, they are allowed to attend the meetings.
However, being present does not mean that they are allowed to exercise their powers, for they have to go through what the committee decides anyway. That means that considering that operational creditors want their money back fast, due to the long term commitments of financial creditors, they are not able to get their due.
The Reason behind the Exclusion
The reason behind the exclusion of operational creditors is this: Operational Creditors need to get repaid fast. To that end, they are not willing to postpone their payments. However, speed does not bode well for an insolvency resolution process that is supposed to fair, expedited and proper. To that end, committee of creditors is only filled with creditor groups that say yes to this efficiency. Furthermore, without sustaining some amount of operational debt, no company shall be able to sustain the long run. Back in 2015, the Bankruptcy Law review committee pushed upon this very fact and pointed towards the allegations that operational creditors can harass the debtors to get their dues.
The Counter Point
Regardless of how logical the rationale is, the truth of the matter is Operational Creditor’s exclusion is a bad idea. Especially when one considers that the salary-men, the wage workers and others might also come within this particular category of creditors. Furthermore, there have been cases where the total operational debt is about 75 percent of the defaulted debts. In this case too, the operational creditor’s rights are often ignored to favour the financial creditors.
This does not seem fair in any way.
There are two solutions present for this matter,
1. The IBC should include some criteria so that the operational creditors can get to be the part of the COC.
2. The NCLT should come with a plan to grant Operational Creditors a position where they can have more impact on the result of the insolvency resolution process.
Fortunately, it is 2019 and now the IBBI is proposing that the operational creditors should infect be granted more power than before. However, it is being still frowned upon by the financial creditors.