IBC a boon for operational creditors

For ages, Indian lenders or debtors
kept complaining as to how there was almost no recourse or reasonable chance of
recovery from erring corporates. I have been witness to some of these cases as
well.

Although there were restructuring
mechanisms under the Sick Industrial Companies Act and Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act
enabled financial creditors to submit their claims, the debtors were left,
well, by and large, high and dry. The operational creditors (e.g., trade
suppliers, employees, etc.) were even worse off. Many of them belonged to small
or medium segment (SMEs) and are worst hit by such non-payments, even forced to
close down, if unpaid for long.

With this background the National
Company Law Tribunal (NCLT) started functioning under the much flaunted
Insolvency and Bankruptcy Code (IBC).

The data trickling in after analysing
one year filings before the NCLT demonstrates encouraging trends. It seems
that even operational creditors stand a reasonable chance in recovering their
dues under the IBC.

Apparently, close to half of the
admitted petitions (by operational creditors) have been either settled or
withdrawn. It indicates that operational creditors reached settlement with the
debtor companies out-of-court.

Since the operationalisation of NCLT,
operational creditors have been outnumbering the financial creditors in terms
of petitions. It seems that operational creditors have finally got a panacea to
recover their debts from defaulting corporates.

The reason for coming forward for
these settlements with creditors by defaulting companies could be the scare of
triggering of the IBC. Once put in place, an insolvency professional would be
given charge of the business and the management of the company can be
temporarily thrown out. This scare of losing control over the coveted crowns
may be prompting the defaulters to settle, where the debts are manageable or
have been intentionally been unpaid despite adequate liquidity and resources.

From the above it appears that IBC is
being used as a recovery tool, which is not the predominant intent of the
government. However, if it forces the debtors to mend their ways and alters
their mindset, it’s worth it. 

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About the author :

Bhumesh Verma is a lawyer with over 2 decades of experience in advising domestic and international clients on corporate transactions (M&A, Venture Capital, Private Equity, Startups, corporate advisory, etc.) and features in “The A-List – India’s Top 100 Lawyers” by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters and is a guest faculty as well. He can be reached at bhumesh.verma@corpcommlegal.com.