New Delhi (IANS) As the Insolvency and Bankruptcy Code (IBC) has evolved over the past three and a half years, with several changes and improvements, operational creditors still largely feel sidelined or neglected when it comes to recovery of dues. Experts suggested that their issues should be looked at and necessary changes must be brought in to address them.
According to Sonam Chandwani, Managing Partner at KS Legal & Associates, with IBC’s waterfall mechanism leaving the operational creditors out, this class of creditors often takes massive haircuts on the outstanding monies owed to them.
“Presently, financial creditors are responsible to provide a fair share of claims by operational creditors who do not form a part of the Committee of Creditors. This myopic vision of the financial creditors to enhance their own realisation could bring the sustainability of operational creditors on the line, leaving a long-lasting scar on the corporate debtor itself in the long run,” she noted.
Daizy Chawla, Senior Partner with Singh & Associates, however, was of the view that although the operational creditors receive almost nothing both in case of a successful resolution and liquidation, it must be noted that the intention of IBC was not recovery. The objective of same was revival of the corporate debtor, she noted.
“It’s for this reason that there is no hierarchy defined under the IBC 2016 for implementation of the resolution plan,” Chawla told IANS.
Noting that the distribution hierarchy or waterfall mechanism is provided in case of liquidation under Section 53 of the Code, she said that courts, during judicial interpretation in various cases, have held that the mechanism provided under Section 53 of the Code can be followed with regard to distribution during the resolution plan.
“Further, the CoC have been given the authority as to how to deal with the proceeds received from the successful resolution applicant, so unless the successful resolution applicant proposes to pay operational creditors, the CoC generally proceeds with distributing the proceeds to financial creditors only as the CoC consist of financial creditors,” she added.
However, Chawla was of the view that if it is considered that one of the objectives of the IBC is to repay the debt of corporate debtors, some changes will have to be made in the Code.
“By not providing operational creditors any amount from the proceeds, it is nothing but creation of another set of defaults which will now be done by operational creditors as their source of revenue is curtailed due to CIRP/liquidation process initiated against those from whom they have to recover. We all understand that commercial activities are a vicious circle wherein one is dependent on another and fall of one will result in fall of another,” she said.
Operational creditors are also not part of the Committee of Creditors mostly, which is formed with the financial creditors. They are granted representation in the CoC only when the debtor does not have any financial creditor.
The right to attend the meetings of the CoC is also limited to operational creditors with an aggregate debt of at least 10 per cent of the total debt of the corporate debtor. So, in this manner, they do not even have much say in the decision-making process and time and again the concerns of their interests have been raised, which experts say, need to be addressed at the earliest.