Suppliers too can file for insolvency

Financial creditors or banks who have lent thousands of crores to corporates have no doubt great bargaining power under the Insolvency and Bankruptcy Code (IBC).

But the code also empowers an operational creditor to proceed against a corporate that has failed to pay its dues. These creditors that include suppliers, employees and workmen can initiate insolvency proceedings on a default of just more than ₹1 lakh.

But while such creditors can trigger the process, they do not have a say in the approval of the resolution plan.

The unique feature of the IBC is that it can be initiated by various parties — financial creditors, operational creditors and borrowers themselves.

According to a report published jointly by Assocham and KSR & Co., most of the cases dealt with under the NCLT across regions, appear to have been filed by operational creditors.

But while the IBC has given more teeth to operational creditors in as far as initiating the process is concerned, they do not enjoy voting rights in the resolution process.

While all the parties — financial creditor, operational creditor and the corporate debtor — are invited to all the meetings held to decide on the resolution plan, only financial creditors or lenders have the right to vote.

If 75 per cent (by value) of the financial creditors approve the resolution, then it becomes binding on all other parties, including the borrowers and operational creditors.

While this may appear as unfair to some, according to bankers and market players, interests of operational creditors will most likely be taken care of. The IBC aims at maximising value for each of the stakeholders, including operational creditors. Also, it is in the interest of all, including lenders, to get everyone on the same page.

There are two kinds of operational creditors — critical and non-critical. “A steel plant requires iron ore, coal, oxygen, etc., in order to produce steel. If the resolution plan does not address the interests of these critical creditors, there will be no steel produced and as a result no cash flows. It is imperative that you have them on board,” says Nikhil Shah, Managing Director at Alvarez and Marsal, an expert in turnaround management.

There are others that feel that allowing an operational creditor to initiate insolvency for a default of just over ₹1 lakh could thwart efforts of lenders who may be trying to resolve the issue with the borrower.

“When an operational creditor is triggering the code, he could possibly be looking at it only as a ‘recovery’ tool to achieve a quick settlement (rather than revival or turnaround of the corporate debtor). But banks, as financial creditors, should ideally be more focussed on ‘resolution’ and better value creation,” says Damini Marwah, Senior Vice-President, General Counsel, Axis Bank.

“An operational creditor sees the provisions under the IBC providing a moratorium on mere admission of his petition as an advantage. Once he triggers the insolvency, he knows that the pressure is now on the lenders or the corporate debtor to prevent liquidation,” says V Srinivasa Raghavan, Partner, IndusLaw.

He adds that a reason for a corporate debtor to trigger the proceedings is to play up creditors against each other. “If there is one creditor who is sympathetic and another is not, you initiate insolvency and make all lenders resolve the issue. Earlier, it was the debtor’s onus to get all the creditors on board,” says Srinivasa Raghavan.

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