Welcome to finance Financial Services.

Locus standi of Operational Creditors in proceedings under IBC

Locus standi of Operational Creditors in proceedings under IBC

An interesting aspect of Insolvency and Bankruptcy Code is the distinction between Financial and Operational Creditors. A key question is what was the legislative intent for it as such distinction is not made in other countries.

The Financial Creditors are given almost full discretion to guide the process of resolution under the IBC framework and they decide on the resolution plan put forward by the resolution applicant.

It’s  possible that in many cases under the IBC, that the resolution applicants / investors will strive to propose a plan that takes care of the Financial Creditors without much regard to the interest of Operational Creditors. Substantial or complete hair cuts may be proposed in resolution plan for Operational Creditors and the irony of the matter is that the Operational Creditors have no say in this matter.

The resolution plan is at most times not shared with the Operational Creditors and their fate is sealed via a judicial pronouncement.

There are a few questions that need to be answered in this respect:

  1. Should the Operational Creditors not have a say under IBC as their interest is directly impacted in the event of resolution ? 
  2. Will it be a good practice to share the resolution plan with the Operational Creditors before the same is presented to Adjudicating Authority for approval ?

Till the law does not give a clear direction on the above, we will continue to have Operational Creditors fighting for their rights as in case of Bhushan Steel resolution where L&T has alleged that the resolution plan is “discriminatory” and “arbitrary”. (Please refer: https://economictimes.indiatimes.com/industry/indl-goods/svs/steel/lt-terms-bhushans-resolution-plan-as-discriminatory-against-operational-creditors/articleshow/63684902.cms )

Another important point to be considered is many of the Operational Creditors could be medium to small scale enterprises and they will not have the wherewithal to hire expensive lawyers to represent and fight their case.

Interestingly, in the above mentioned case, L&T has claimed it to be an “Operational Secured Creditor” which throws up another debate of whether they have a priority in waterfall over other “Operational Creditors”.

These are very pertinent issues and some of these may get addressed in the near future as the IBC is believed to be undergoing a major overhaul.  Lesser the scope for litigation, more cases will be resolved thereby enlarging the stakeholder confidence.

Write a Reply or Comment

Social Media Auto Publish Powered By : XYZScripts.com