Legal Realities For Operational Creditors In CIRP: An Analysis Of The Insolvency And Bankruptcy Code, 2016

Bhoomijaa.C.S, National Law School of India University

INTRODUCTION

The Insolvency and Bankruptcy Code, 20161 (hereinafter ‘the Act’/ ‘IBC’), enacted with the intention of reforming and resolving the failing legislations in India's insolvency landscape, aims primarily at achieving resolution and, when that proves impossible, offers liquidation procedures. The act aims to facilitate the swift repayment of creditors with minimal haircuts while balancing the interests of all stakeholders. Unlike traditional processes where debtors are mostly in control, the IBC ensures that creditors hold power through the creation of the Committee of Creditors (CoC), and the Stakeholders consultation committee (SCC) which play a vital role in decision-making. Despite being in its nascent stages, the law has shown positive changes and developments in the field. However, this progress has placed one of the primary stakeholders—Operational Creditors (OC), essentially unsecured creditors—in a confusing and disadvantaged position.

In Section 3(10), the IBC, in a never before move differentiates creditors solely based on the nature of debt into financial creditors (Hereinafter FC) and operational creditors (Hereinafter OC). Section 5(20) defines OC as those to whom the company owes an operational debt- debt incurred through day-to-day operations, extending to goods and services, rents, utilities, and similar transactions ( The exact categorization of a creditor as financial or operational remains subject to ambiguity). Despite both categories of creditors having equal rights to initiate Corporate Insolvency Resolution Process (CIRP) or liquidation, only financial creditors are granted voting rights in the CoC. Further up, the liquidation value for resolution is determined by a waterfall mechanism, where OC’s end up getting amounts which are often negligible or equivalent to zero.