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  1. Relief for suppliers to insolvent companies: IBC amendment now provides priority to operational creditors

Relief for suppliers to insolvent companies: IBC amendment now provides priority to operational creditors

An amendment to the CIRP Regulations provides that the amount due to operational creditors under the resolution plan shall be paid in priority over financial creditors

By: | New Delhi | Published: October 11, 2018 2:57 AM
There is scant protection which has been given under the IBC and its attendant regulations to the operational creditors.

-Abir Roy

The treatment of operational creditors under the IBC has been a subject of numerous deliberations. There is scant protection which has been given under the IBC and its attendant regulations to the operational creditors. While there is no doubt as to the fact that the banks and financial institutions have more skin in the game due to their vast exposure, the operational creditors also have a huge role to play to ensure that the corporate debtor is in operation and thus their rights should also be given due importance.

Numerous defaults and protracted settlement periods were the business risks which the operational creditors always had to take, however, after the IBC, there is a moratorium which has been imposed on them to initiate any action against the debtor to recover the said moneys. They were left to be at the mercy of the resolution process.

The operational creditors do not form a part of COC irrespective of the amounts owed to them, and hence they had limited/no say in the entire resolution process, and due to the legal fiction created under the IBC, a resolution plan which was approved by the COC and consequently by the NCLT was binding on the operational creditors. This is against the basic principle of privity/novation of contracts since they had to incur significant haircuts under the resolution plan with no scope of discussion with the RP and COC.

When the said resolution plans were challenged before NCLT/NCLAT, the operational creditors were unable to succeed since, under the CIRP Regulations, the operational creditors were only guaranteed the liquidation value. It is noteworthy that in most resolution cases, the liquidation value is zero, ergo, the guaranteed amount to operational creditors is zero and thus, any amount given to such operational creditors was sadly, a “bonus”. Thus, despite vast haircuts and prima facie harm to operational creditors, the law accorded minimal protection for such creditors. It is not surprising that most of the operational creditors are now before the SC to safeguard their interest which the SC can do under their inherent powers.

Seeing this unfortunate malady, the IBBI has amended the CIRP regulations to protect the interest of operational creditors. The Regulations earlier provided for the payment of liquidation value to operational creditors in priority. The amendment has substituted the said regulations to provide that the amount due to operational creditors under the resolution plan shall be paid in priority over financial creditors. The aspect of liquidation value being guaranteed is now deleted. Further, the IBBI also had inserted an amendment in October of last year wherein it has been made mandatory that the resolution applicants must provide a statement to show how it has considered the interest of all creditors, including operational creditors. This is a significant development since the interest of operational creditors will be looked into in greater detail under the resolution plan and their interest cannot be brushed aside by merely stating that such trade creditors are getting more than liquidation value, which was zero in most of the cases.

While it remains to be seen how it actually benefits the operational creditors in practice, it is a significant development for the operational creditors. It may be argued that appropriate marks are given in evaluation matrix for deliberating a resolution plan on the manner in which operational creditors are paid back and also how they will be involved going forward.

At the bare minimum, it gives an opportunity to the operational creditors to present their case before the adjudicatory authorities created under the IBC to safeguard their rightful interests.

-The author is Advocate, Seetharaman and Associates

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