Operational creditors in the resolution plan of a company would be better served if the Insolvency and Bankruptcy Code (IBC) is redrafted by either granting them the right of participation with a proportionate vote or assuring them a minimum payment (as against ‘priority’ with no assured minimum payment, currently).

In the case of Jet airways, operational creditors (including employees) have more stake than financial creditors, says Bijoy Pulipra, a company secretary and resolution professional. The financial creditor-driven scheme ruled out an active role for them in approving the final resolution plan. They are left with no option but accept the financial creditors’ decision.

Employees, worst affected

Employees are one of the worst affected parties in an insolvency process, he said. When a plan is filed with the Adjudicating Authority, natural justice demands that details be given to employees. Section 61 of IBC lends an opportunity to any aggrieved party to approach the appellate forum, but its scope is limited.

The apex court has ruled that no one should interfere in the commercial wisdom of the Committee of Creditors (CoC). Request of the unions for a copy of the resolution plan is reasonable and its denial unfortunate, Pulipra said. Delay in disposal of the plan by the Adjudicating Authority is also worth the mention here.

Confidentiality of contents

The IBC reiterates the need to maintain maximum confidentiality of contents of the resolution plan and valuation reports if only to ensure a fair and transparent bidding process. But once a plan is finalised and approved and filed with the NCLT, there is no requirement for such extreme confidentiality, he opined.

Coming to the DHFL resolution plan, Pulipra said NBFCs (which include housing finance companies) with asset size of Rs 500 crore or more are now covered under the provisions of the IBC. This is being seen as a great relief for investors of the ailing NBFC. And DHFL was the first such to be referred for bankruptcy proceedings.

Out of the total debt of ₹87,000 crore payable to various stakeholders, 52 per cent amounted to payment towards debenture holders. The NBFC received two resolution plans from the Piramal Group and Oaktree Capital, a US-based asset management company.

More foreign entities welcome

The Piramals went on to amass 94 per cent of the votes to clinch it. Lenders, including deposit holders, may have been forced to take a haircut of nearly 52 per cent, but DHFL is expected to revive its operations soon. There is no harm in permitting a foreign entity to participate in the process, Pulipra said.

But some of them had questioned the transparency level in many recent high-value resolution processes and also alleged partiality on the part of the CoC. These issues may be resolved in order that even more interested bidders join and raise the success rates of the plans, he observed.

Assured minimum payment

Under Section 53 of the IBC, distribution of proceeds is based on the ‘waterfall mechanism’ which puts financial creditors at the front, followed by employees and workmen. In a distribution waterfall, IBC gives priority to operational creditors and dissenting financial creditors. But the scheme does not provide for a ‘minimum payment’ requirement.

Giving priority without an assured minimum payment is not a good proposition. Operational creditors are now being compelled to leave the scene with empty hands. At DHFL, financial creditors represented the majority while employees and other creditors did not count much. Details of the distribution pattern can be analysed only after the final approval of the plan by the Adjudicating authority, Pulipra said.

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