IBC a boon for operational creditors

For ages, Indian lenders or debtors kept complaining as to how there was almost no recourse or reasonable chance of recovery from erring corporates. I have been witness to some of these cases as well.

Although there were restructuring mechanisms under the Sick Industrial Companies Act and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act enabled financial creditors to submit their claims, the debtors were left, well, by and large, high and dry. The operational creditors (e.g., trade suppliers, employees, etc.) were even worse off. Many of them belonged to small or medium segment (SMEs) and are worst hit by such non-payments, even forced to close down, if unpaid for long.

With this background the National Company Law Tribunal (NCLT) started functioning under the much flaunted Insolvency and Bankruptcy Code (IBC).

The data trickling in after analysing one year filings before the NCLT demonstrates encouraging trends. It seems that even operational creditors stand a reasonable chance in recovering their dues under the IBC.

Apparently, close to half of the admitted petitions (by operational creditors) have been either settled or withdrawn. It indicates that operational creditors reached settlement with the debtor companies out-of-court.

Since the operationalisation of NCLT, operational creditors have been outnumbering the financial creditors in terms of petitions. It seems that operational creditors have finally got a panacea to recover their debts from defaulting corporates.

The reason for coming forward for these settlements with creditors by defaulting companies could be the scare of triggering of the IBC. Once put in place, an insolvency professional would be given charge of the business and the management of the company can be temporarily thrown out. This scare of losing control over the coveted crowns may be prompting the defaulters to settle, where the debts are manageable or have been intentionally been unpaid despite adequate liquidity and resources.

From the above it appears that IBC is being used as a recovery tool, which is not the predominant intent of the government. However, if it forces the debtors to mend their ways and alters their mindset, it’s worth it. 

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The author is a senior international corporate lawyer and can be approached at [email protected]