Creditor conundrum persists under the code

A key objective of the Insolvency and Bankruptcy Code, 2016, has been to ensure early resolution of financial distress of stressed corporates, and ensuring their earliest revival. In carrying out this task, the code relies on a creditor-driven process with limited judicial intervention and a requirement to form a committee of financial creditors to help facilitate the revival, or in the eventual failure of such revival, liquidation of the corporate.

While the overall scheme of the code with respect to the “creditor in control” principle after a default is sound, the code has inadequately provided for the rights of all types of creditors within its scheme. The code primarily recognizes only two broad categories of creditors – financial creditors are those creditors who have advanced a debt against the consideration of time value of money, and operational creditors who are owed debt on account of provision for goods and services. Thus, the code provides only for rights, protections and roles for these two categories of creditors in the entire insolvency resolution process laid out under the code. Only these creditors can initiate the processes under the code; only the financial creditors have decision making power to approve or reject a resolution plan, and a resolution plan needs to provide for liquidation value for dissenting financial creditors and operational creditors.

The code, however, has fallen short of encapsulating within its scheme a whole universe of creditors who are equally affected by the defaults of corporates, but have no recourse and effective rights under the code.

Misha is a partner at Shardul Amarchand Mangaldas & Co, while Siddhant Kant is an associate at the firm