The Insolvency & Bankruptcy Code, 2016 ('IBC/Code') has been introduced into the legal system to shift and anchor the creditor-oriented regime rather than the customary practice of debtor-oriented regime. A Company works not just on capital or funds but involves a large chunk of goods and services in running a successful Company they all are considered to be the stakeholders of the Company. Under the Code, resolution is a process which aims to revive a sick Corporate Entity. While reviving a Corporate Debtor, the main focus is not only towards the maximization of value of assets of the Corporate Debtor but also ensuring that the interest of all the stakeholders is balanced. Maintaining the interest of all the stakeholders is an essential aim of the Code. However, today, in all the practical scenarios the interest of stakeholders remains highly unbalanced especially when a comparison is drawn between the Operational Creditors and Financial Creditors.

When the Corporate Insolvency Resolution Process ('CIRP') is initiated by the Adjudicating Authority ('AA') qua the Corporate Debtor, an Insolvency Professional ('IP') is appointed, who forms a Committee of Creditors ('CoC'), as per the provisions enshrined under the Code. It is imperative to note that the Code specifically mentions under the Regulation 16 of the Insolvency & Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons), Regulation 2016, ('CIRP Regulations') that usually the CoC shall comprise of only non-related Financial Creditors whose claims have been received and verified by the IP and in cases, where there exists no such Financial Creditors of the Corporate Debtor, only then the Operational Creditors would form the CoC. The CoC is empowered to take major decisions regarding the revival of the Corporate Debtor, which are considered to be in the best interest of the Corporate Debtor as the CoC manoeuvres its commercial wisdom.

The legislation lacks to provide due importance to the Operational Creditors while constituting the CoC and the reason behind such differential treatment has been discussed by the law makers in the Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design (November 2015)1. The relevant para of the report is reproduced herein below:

"The Committee deliberated on who should be on the creditors committee, given the power of the creditors committee to ultimately keep the entity as a going concern or liquidate it. The Committee reasoned that members of the creditors committee have to be creditors both with the capability to assess viability, as well as to be willing to modify terms of existing liabilities in negotiations. Typically, operational creditors are neither able to decide on matters regarding the insolvency of the entity, nor willing to take the risk of postponing payments for better future prospects for the entity. The Committee concluded that, for the process to be rapid and efficient, the Code will provide that the creditors committee should be restricted to only the financial creditors."

It has been categorically discussed that the Code differentiates between the Financial Creditors and Operational Creditors. The intent of the law makers is very clear regarding the authority given to the Financial Creditors, as they have duly analysed that the Financial Creditors have the capability to assess the viability and willingness to modify the terms of existing liabilities in negotiations, whereas, the Operational Creditors may not be well-equipped with the business of money lending. It is essential to understand herein that financial contracts involve huge amounts, which are generally given by Banks, Financial Institutions and in some cases by Individuals, whereas, the Operational Creditors are much larger in number and their quantum of dues are usually smaller as compared to the Financial Creditors. Even though the Financial Creditors and the Operational Creditors have a specified re-payment and payment schedules, the Financial Creditors has the right to recall the loan in totality when the Company defaults, which the Operational Creditors lacks. Even though financial assistance is vital for a Company to grow, the importance of the Operational Creditors cannot be ignored blatantly when the revival of the Corporate Debtor is being considered. The Operational Creditors are deprived of proper audience as far as the CoC is concerned, even after being an essential part of the business of the Corporate Debtor.

The CoC, dominantly constituting of the Financial Creditors, has been further empowered by the Code to even settle and withdraw the ongoing CIRP proceedings under Section 12A of the Code with at least 90% of the majority voting. In this process of withdrawal, it is apposite to ponder upon the fact that, since the CIRP is ongoing, many Operational Creditors file their claims before the Resolution Professional and suddenly when the CoC agrees to withdraw the proceedings, the Operational Creditor are merely left with a sudden shock, as firstly, they are not part of the CoC and even if they attend the meeting, they have no right to vote. Thus, the Financial Creditor enjoys an exceptional advantage over other the Operational Creditors and it is evident that the Operational Creditors are invariably discriminated.

Since long, the economy was enjoying a debtor driven regime in the presence of earlier statutes for recovery of the monies, however, with the introduction of the Code, a welcoming change came in. However, it is substantial to note that, economy is not just about the inflow and outflow of the money but is majorly controlled by market forces. In a country, production and consumption of goods strongly determines its economy. Generally, the supply of goods and services by the Operational Creditor are mostly on credit basis, which becomes part of the working capital for the Corporate Entity. With the introduction of the Code, the clear preference given to the Financial Creditor rather than giving appropriate importance to Operational Creditors can hit the country's economy massively, as the Operational Creditors, even though being one of the essential pillars of the Corporate Debtor entity fails to have a mere representation in the CoC. Thereby, the Operational Creditors, may in near future, be hesitant to carry forward their business under such set-up of revival. It is evident that the Code has not provided equal treatment to all the Creditors rather has preferred only the Financial Creditors as the supreme Creditors amongst the other class of Creditors. Therefore, it is evident that the Secured Financial Creditor enjoys an exceptional advantage over other creditors.

One has to understand that not only a Financial Creditor takes risks while giving loan to the Company, moreover, these Lenders are well backed by sufficient security, but it is the Operational Creditors who have risked a lot more than the Financial Creditors in providing operational support to the Company and in the end the priority to make all the substantial decisions regarding the Company has been given solely to the Financial Creditors forming the part of the CoC. Further, the Financial Creditors have been bestowed with the fiduciary duty to ensure that the interest of all the stakeholders is taken care off.

It is noteworthy that the Operational Creditors i.e., the vendors, the suppliers etc., of raw materials to the Corporate Debtor, comprises of a major chunk of the Operational Creditors apart from the employees, workmen and statutory authorities, who are totally neglected while making imperative decisions on behalf of the Corporate Debtor, during the revival process as well as liquidation process. It is essential to ponder that, any discrimination with the Operational Creditor may in long-run discourage a lot of the Operational Creditors to work on credit basis, thereby eventually demoralizing the enterprise and economy as a whole. At this instance, it is imperative to state herein that in the matter of Binani Industries Limited v. Bank of Baroda & Anr.2, the Hon'ble National Company Law Appellate Tribunal, New Delhi has held that ".e. (iv) If one type of credit is given preferential treatment, the other type of credit will disappear from market. This will be against the objective of promoting availability of credit." It is apposite to state that, to run the Company not only Capital is important but also the materials and/or services supplied or provided, as the case may be, by the Operational Creditor.

It is certain to state herein that the Insolvency Law Committee Report3 ('ILCR') specifically highlights the purpose of insolvency law under Clause 10.2, which categorically considered the BLRC Report which emphasize on having a collective mechanism for resolving insolvency within a framework of equity and fairness to all stakeholders as one of the hallmarks of a well-developed insolvency regime. Further, the said clause highlights that ".the degree of creditor participation is considered a key factor in determining the effectiveness of an insolvency regime." The intention of the legislation to give due importance to all the classes of Creditors, has been clear since the evolution of the Code. Further, the Clause 10.3 has specifically quoted the UNCITRAL Guide, which recommends that an insolvency law should specify that a creditor or equity holder whose rights are modified or affected by the plan should not be bound to the terms of the plan unless that creditor or equity holder has been given the opportunity to vote on approval of the plan. It is imperative to note that in the Report, the Committee has well discussed that if the Code does not provide Operational Creditors with an opportunity to express their dissent against a resolution plan which materially modifies their existing contractual rights, it may result in a deficit of trust and confidence among operational creditors in the final outcome of CIRP. The Report had a vivid intention to ensure that the CIRP is regarded as a fair and just process by permitting meaningful participation of the Operational Creditor in the decision-making process. It is essential to state herein that, the World Bank Principles for Effective Insolvency and Creditor/Debtor Regimes has also fairly recommended that "creditor interests should be safeguard by appropriate means that enable creditors to effectively monitor and participate in insolvency proceedings to ensure fairness and integrity." At this instance, it is certain to understand that the Code, as it stands today, nowhere allows any class of the stakeholders except the Financial Creditor, to vote upon the plan and further goes on to even state that such approved plan is binding on all the stakeholders, even though they have not deliberated or voted upon.

Comparatively, the insolvency regimes of various other jurisdictions allows participation of all affected creditors in a reorganisation proceeding. Reference is drawn to the United States of America ('USA'), wherein a reorganisation plan would not be confirmed by a Bankruptcy Court unless it is accepted by every class of creditors and shareholders whose rights are impaired by it and certain additional conditions are met with4. It is imperative to refer herein the stance taken by Senior Advocate Kapil Sibal, in the Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta & Ors.5 ('Essar Judgment'), by referring the American Jurisprudence6, that under our Code, reorganisation is a collective remedy designed to find an optimum solution for all parties connected with a business in the manner provided by the Code, however, protecting Creditors is an important objective as well as protecting the Creditors from each other.

Further, the Committee also considered that Insolvency Act, 1986 of the United Kingdom ('UK'), that a voluntary arrangement proposed on behalf of a Corporate Debtor involving a composition in satisfaction of its debts or a scheme of arrangement of its affairs must be accepted by three-fourths in value of all the creditors of the debtor and a majority in value of the members voting in a meeting7. Considering the intricacies of having a fair and just CoC, the ILCR Committee agreed that it would be beneficial to provide Operational Creditors with voting powers in meetings of the CoC, in order to ensure that the provisions of the Code are aligned with the global best practices. Furthermore, in the Report8 the Committee has also taken into aspect the situation wherein, the Operational Creditor, if are conferred with the voting rights, then in order to maintain the efficiency of the CoC, they should be represented by an authorised representative. Moreover, in the ILCR, the Committee has noted that while the Operational Creditors are currently not conferred with the voting rights in the CoC, efforts have been taken to protect their rights during the CIRP. Certainly, the BLRC Report, considered that, there must be a counterbalance to operational creditors not having a vote on the creditors committee and thus, the Committee concluded as an explicit part of the proposed solution that, the dues of the operational creditors must be paid in priority9.

It is humbly suggested that the Law Makers should consider the importance of Operational Creditor's participation in the CoC but not only limited to mere participation rather appropriate voting rights may also be provided in certain essential and specific matters, so that not only the Operational Creditors are aware and vigilant with their power endowed by the Code but a sense of transparency is also maintained between all the essential class of creditors of the Company. Therefore, a system of checks and balances would be maintained in an efficient manner aiming towards the growth of the economy.

It is evident that the IBC in its present form is not at all an operational creditor-friendly regime, rather, the discrimination between the Financial Creditor and the Operational Creditor is not only limited to an appropriate representation in the CoC but further goes on to the repayment schedule as well, wherein the Operational Creditor generally receives the lowest repayment deal or sometimes even zero. Thereby, in order to promote the business culture and to ensure that the balance in the economy is maintained, it is just and necessary to have at least, an essential representation in the CoC as well as a minimum entitlement or percentage of amount that is paid to the Operational Creditors, irrespective of the fact that the Corporate Debtor is being revived or liquidated, just how the importance of Financial Creditors are being considered at present.

All in all, it is true that, IBC is relatively a young Code with teething problems, however, the legislature along with the judiciary has come a long way in amending and making IBC a just and fit Code and at present, there arises another scenario which requires a good room of improvement and necessitates some basic amendments to the Code for ensuring a fair, equitable and justified interest of all the creditors of the Corporate Debtor. It is certain that no change can be introduced in the economy overnight, to make a Code full-proof one, that too in a huge economy like India.

Footnotes

1. BLRC Report Vol.1 November' 2015

2. Company Appeal (AT) (Insolvency) No.82 of 2018

3. Report of the Insolvency Law Committee' February' 2020.

4. 11 US Code; Clause 10.4 of ILCR 2020

5. Civil Appeal No.8766-67 of 2019

6. Chapter 11 Reorganisation

7. Section1-7B of Insolvency Act, 1986; Clause 10.4 of ILCR 2020

8. Clause 10.8 of ILCR 2020

9. BLRC Report'2015- Para No.3 under Point 5.3.3- 'Obtaining the resolution to insolvency in the IRP'

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