Introduction
Operational creditors under Insolvency and Bankruptcy Code, 2016 (IBC) are the ones who supply goods or services to the corporate debtor in exchange for operational debt. As per Section 5(20) of IBC, an “operational creditor” means a person to whom an operational debt is owed. Section 5(21) of IBC defines “operational debt” as
“a claim for the provision of goods or services, including employment, or a debt for the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government, or a local authority.”
Whenever, a default occurs by the corporate debtor, the Corporate Insolvency Resolution Process (CIRP) can be initiated either by a financial creditor, an operational creditor or corporate debtor itself.
Financial creditors may initiate the CIRP by filing an application u/s. 7 of IBC, 2016 before the Adjudication Authority i.e National Company Law Tribunal (NCLT) against the corporate debtor upon occurrence of a minimum default of Rs. 1 crore. However, an Operational Creditors must first issue a ‘Demand Notice/Invoice of Payments’ under section 8 of IBC, 2016 to the corporate debtor and has to wait for a period of 10 days to file an application before the NCLT to initiate insolvency proceedings.
Position of operational creditors after the initiation of CIRP –
After initiation of the CIRP, Committee of Creditors (CoC) is constituted under section 21 of the IBC. The CoC mostly consists of only financial creditors and the operational creditors have no voting rights, however in cases where there is no financial creditors, the operational creditors forms part of the CoC. The operational creditors are also stayed from taking any legal actions against the corporate debtor due to the moratorium u/s14 of IBC, 2016. As moratorium is initiated to put a hold on any legal proceedings against corporate debtor. Though the operational creditors are invited to be a part of CoC meetings when the aggregate dues exceed 10% of the total debt owed by the corporate debtor, the invitation does not extend to any voting right. The voting powers given to the financial creditors under section 21 of the code, are effectively to dominate and discriminate against the operational creditors in the decision making.
Differential Treatment under Section 53 of IBC –
Section 53 of the IBC lays down the waterfall mechanism for distribution of assets during liquidation of the corporate debtor. It clearly distinguishes between secured financial creditors, unsecured financial creditors, and operational creditors, placing operational creditors lower in priority for distribution of proceeds from sale of assets.
A major concern arises where the operational creditors are provided only the “liquidation value” under a resolution plan based on a restrictive interpretation of Section 30(2)(b) of the IBC. If the operational creditors consistently receive minimal recovery, it may discourage suppliers and service providers from extending credit to the corporate entities. This could lead to a commercial environment where advance payments are demanded by the operational creditors for all the transactions, which would undermine business flexibility and adversely affect the broader economy.
Therefore, while the IBC emphasizes maximization of value and revival of the corporate debtor, a balanced approach between financial creditors and operational creditors is essential. Any resolution plan that is manifestly discriminatory or unfairly prejudicial to either class of creditors may be challenged as being contrary to the objectives and provisions of the IBC.
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