The Insolvency and Bankruptcy Code (IBC) enacted in 2016 marked a significant milestone in India's financial landscape, aiming to streamline and expedite the resolution process for distressed companies. However, amidst the laudable goals of the IBC, a glaring shortfall has emerged – the absence of a mechanism ensuring equitable treatment for operational creditors (OCs) in the distribution of realized proceeds of resolution. This oversight has sparked a fresh pitch for amendments to the IBC, spearheaded by insolvency experts who argue for a fair share for OCs.
The Current Scenario
Under the existing framework of the IBC, financial creditors (FCs) hold primary claims on the assets during distribution, relegating OCs to a secondary position. This dichotomy has resulted in disproportionately low recoveries for OCs, as evidenced by the meagre 0.8% share they receive under liquidation, according to the latest data from the Insolvency and Bankruptcy Board of India (IBBI). This disparity is exacerbated by the predominant focus on FCs' rights in the discourse surrounding the apportioning of realized values under the code.
Case studies further underscore the plight of OCs, with instances where FCs recovered substantial portions of their claims while OCs received negligible or zero value. For small enterprises that often function as OCs, such disparities translate into significant financial setbacks, highlighting the adverse impact of the current regime on small businesses and the broader supply chain ecosystem.
Challenges Faced by Operational Creditors
The challenges faced by OCs stem from various factors inherent in the IBC framework. Firstly, the nature of OCs' debts, primarily unsecured, puts them at a disadvantage compared to FCs, who typically hold secured debts backed by collateral. Secondly, the composition of the Committee of Creditors (CoC), where FCs wield significant influence, further marginalizes OCs, limiting their ability to influence resolution outcomes.
Moreover, the mandated payment of a minimum of the liquidation value to OCs, while a globally accepted principle, fails to address the fundamental imbalance in recoveries between FCs and OCs. Without meaningful statutory protection or effective representation in the resolution process, OCs continue to bear the brunt of insolvency proceedings, jeopardizing their financial viability and disrupting the supply chain dynamics.
Proposed Solutions and the Way Forward
Recognizing the imperative for reform, insolvency experts advocate for amendments to the IBC to safeguard the financial rights of OCs. One proposed solution involves establishing a minimum threshold for OCs' recoveries, whether in terms of asset value, percentage of outstanding claims, or proportion of recovery relative to FCs' recoveries. This would ensure a more equitable distribution of proceeds and instil confidence among suppliers engaging with distressed corporates.
Additionally, the proposal for a mediation process specifically tailored for OCs presents a promising avenue for negotiating recoveries outside the formal insolvency proceedings. By running parallel to the admission proceedings and offering an alternative to the CoC route, mediation could expedite resolutions and mitigate the adverse effects of protracted insolvency battles on OCs.
However, it's essential to acknowledge the limitations of existing data sets, which may overlook amounts recovered by OCs through settlements outside the IBC process. While such settlements offer relief to some OCs, they do not address the systemic challenges inherent in the current insolvency framework, necessitating comprehensive reforms to ensure fair treatment for all stakeholders.
Conclusion
The quest for a more equitable insolvency regime in India demands urgent attention to the plight of operational creditors. As the backbone of the economy, small businesses and suppliers play a pivotal role in sustaining economic activities and fostering growth. By reimagining the IBC to accommodate the interests of OCs through amendments and innovative mechanisms like mediation, India can reinforce its commitment to inclusive and sustainable economic development. It's imperative for policymakers, industry stakeholders, and insolvency professionals to collaborate in charting a path towards a more just and resilient insolvency framework that upholds the rights and dignity of all creditors.
Comentarios