The Fate of an Operational Creditor: A Brief Update

[Shayonee Dasgupta is an independent legal practitoner, and also works a consultant with IDIA]

Ever since the Insolvency and Bankruptcy Code (IBC) was enacted in 2016, it has been the focal point of several cases before the Supreme Court and various High Courts across the country. One of the key provisions of the IBC that has been the subject matter of a majority of such petitions is the definition of “operational creditor” and the protections provided to an operational creditor under the IBC. An operational creditor under the IBC is a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred. They are suppliers of good or services to any company or operational debtor. Since the operational creditors are not part of the committee of creditors (COC) under the IBC, they are simply bound by the decisions taken by the COC and the plan approved by the National Company Law Tribunal (NCLT), irrespective of their exposure in the company.

Prior to the amendments enacted to the IBC in October 2018, there was very little protection available to an operational creditor. The erstwhile regulation 38(1) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 made matters even more complex. The said regulation provided that the resolution plan should identify the specific sources of funds that will be used to pay the liquidation value which is due to the operational creditors and make such payments in priority to the financial creditor. Such payments were required to be made prior to the expiry of 30 days after the approval of a resolution plan by the NCLT.

The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Fourth Amendment) Regulations, 2018, which were notified on 5 October  2018 provided that the resolution plan should mandatorily provide that the amount due to operational creditors under a resolution plan shall be given priority in payment over financial creditors. Therefore, what was required was payment of all amounts which are due to the operational creditors in priority to the financial creditors and not just the liquidation value.

This was a significant change which provided some relief to the operational creditors. However, one still wondered how the position of an operational creditor would significantly change given that the CoC, which is only comprised of financial creditors, have the right to decide the amounts payable to an operational creditor. The amendment only brought in parity with respect to the priority of the payments to be made.

It appears that Supreme Court has taken a step to remedy the grievances of the operational creditors. A petition has been filed by Sanjay Singhal, promoter of Bhushan Power and Steel, before the Supreme Court challenging the constitutional validity of several sections of the IBC. According to a news report carried by the Economic Times, Sanjay Singhal has submitted to the Supreme Court that the IBC is an “imbalanced economic provision”. The Economic Times now reports that, while hearing the petition, the Supreme Court on 17 December 2018 noted that while the debt of the operational creditors is huge, at present they don’t have any say in the resolution process. The Court felt that the operational creditors should have a say in the resolution proceedings in proportion to their debt and even have voting rights. It has directed the Attorney General to deliberate over this proposition and present the arguments once Supreme Court resumes hearing of the petition after the winter vacation.

It remains to be seen how the Government reacts to the direction of the Supreme Court and the steps that it takes to provide relief to the inherently inequitable position of an operational creditor under the IBC.

Shayonee Dasgupta

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