Revamping Insolvency Resolution: Addressing the Plight of Operational Creditors under IBC
The median recovery for operational creditors under the Insolvency and Bankruptcy Code (IBC) stands at a mere 6%, highlighting the need for a hybrid insolvency resolution process to address their concerns.
Insolvency And Bankruptcy CodeOperational CreditorsIbcHybrid Insolvency Resolution ProcessMsmesReal EstateJul 14, 2024
Operational creditors, including trade creditors or employees, have provided goods or services to the corporate debtor or government and its instrumentalities that are owed debt for payment of dues arising under law. Despite their crucial role, they are often left with meager recoveries due to their low priority in the payment waterfall under Section 53 of IBC.
The report suggests a hybrid insolvency resolution process to address the issue. It proposes that a resolution applicant should be legally bound to pay operational creditors their full dues in case the corporate debtor wishes to avoid the risk of another resolution plan being approved. This approach ensures transparency and provides a level playing field for operational creditors.
The report also draws inspiration from international experiences, such as the US bankruptcy law, where trade creditors have the right to participate in a bankruptcy case through official committees of unsecured creditors. This has led to the concept of paying critical vendors becoming increasingly common in Chapter 11 cases.
The proposed hybrid procedure aims to provide operational creditors with a greater say in the resolution process. By ensuring their full dues or an assured percentage of recovery, the process will become more transparent and competitive, ultimately benefiting Micro, Small, and Medium-sized Enterprises (MSMEs) and other operational creditors.
In conclusion, it is essential to revamp the insolvency resolution process to address the plight of operational creditors. By adopting a hybrid approach, India can ensure a more equitable and transparent process, ultimately leading to better recoveries for all stakeholders involved.
Insolvency Law Academy is a leading institution focused on promoting knowledge and research in the field of insolvency and bankruptcy.
EY is a multinational professional services firm providing assurance, tax, consulting, and financial advisory services.
Chandhiok & Mahajan is a law firm specializing in litigation, arbitration, and corporate law.
Frequently Asked Questions
What is the median recovery rate for operational creditors under IBC?
The median recovery rate for operational creditors under IBC is 6%.
What is the primary reason for the low recovery rate of operational creditors?
The primary reason is their low priority in the payment waterfall under Section 53 of IBC.
What is the proposed solution to address the concerns of operational creditors?
A hybrid insolvency resolution process that ensures operational creditors receive their full dues or an assured percentage of recovery.
How does the US bankruptcy law treat trade creditors?
Trade creditors are treated as unsecured creditors and have the right to participate in a bankruptcy case through official committees of unsecured creditors.
What benefits will the proposed hybrid procedure bring to operational creditors?
The hybrid procedure will provide operational creditors with a greater say in the resolution process, ensure transparency, and lead to better recoveries.
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