In the context of insolvency and liquidation under the Insolvency and Bankruptcy Code (IBC), operational creditors (OCs) have consistently received a minimal share of the resolution and liquidation proceeds. According to the latest data from the Insolvency and Bankruptcy Board of India (IBBI), OCs received only 0.88% of the total amount claimed during the liquidation of a stressed asset. This minimal recovery reflects a broader trend under the IBC, where OCs, despite an increase in overall claims, continue to secure a negligible portion of the proceeds.
The IBC framework prioritizes financial creditors (FCs) over OCs, primarily due to the nature of their debts and their role in the Committee of Creditors (CoC). FCs typically hold secured debts, backed by collateral, which grants them higher priority in asset distribution. In contrast, OCs often possess unsecured claims resulting from the supply of goods and services, positioning them lower in the hierarchy of debt recovery. This disparity is compounded by the limited influence of OCs within the CoC, which largely determines the resolution outcomes. OCs generally lack voting rights unless their claims are substantial, thus restricting their ability to affect decisions regarding asset distribution.
The persistent disparity in recovery rates has highlighted a significant gap in the IBC's provisions for protecting the interests of OCs. Analysts and insolvency experts have underscored the need for reform to address this imbalance. They advocate for a statutory mechanism that ensures a fairer distribution of proceeds to OCs, suggesting that increased competition and better asset price discovery could improve recoveries. The current lack of a robust framework to guarantee proportional recoveries for OCs is seen as a key issue that needs to be addressed to enhance fairness in the resolution process.
Some experts propose setting a threshold for OC recoveries to ensure a more equitable distribution of assets without compromising the rights of secured creditors. They stress the importance of carefully balancing reforms to maintain the integrity of the insolvency process and investor confidence. While there is discussion about potential amendments to the IBC, including the possibility of introducing measures to improve OC recoveries, it remains uncertain whether these changes will be included in the upcoming winter session of Parliament.
Overall, the IBC's current approach results in operational creditors receiving a significantly lower share of recoveries compared to financial creditors, highlighting the need for a more balanced and equitable framework to safeguard their interests in insolvency proceedings.
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