Amended IBC ensures a better deal for operational creditors
09 October 2018
The amendments to the Insolvency and Bankruptcy Code that accords priority in payment to unsecured operational creditors above financial creditors, will help improve recovery rate of banks’ bad loans as banks will vie with suppliers and other operational creditors for recovery of dues.
The Centre has amended the Insolvency and Bankruptcy Code to accord priority in payment for unsecured operational creditors and investors relaxing the monopoly of banks and financial institutions in loan recovery.
“The amount due to the operational creditors under a resolution plan shall be given priority in payment over financial creditors”, the amended regulation stated.
While the amended IBC gives priority to small and unsecured operational creditors who currently have no say in the resolution plan, the resolution is still overseen by financial creditors.
The committee of creditors (CoC) that comprises financial creditors to the bankrupt entity still approves the resolution plan.
However, the amendments that give first right to operational creditors in a debt resolution plan will ensure a better deal for small operational creditors as the CoC will have to consider their interest as well.
Until now, operational creditors could have voted on the resolution plan only if they account for more than 10 per cent of the overall default.
So far, most operational creditors were at the receiving end in resolution plans approved by the CoC. In the case of Bhushan Steel, infrastructure major L&T had to move the Supreme Court to recover its dues of Rs900 crore.
Also, as many as 70 operational creditors of Binani Cement had to form a forum to claim their dues.
Sources in the banking sector also said that without cooperation from operational creditors banks leading the insolvency process will not be in a position to implement a successful debt resolution plan.
The union cabinet had in May approved amendments to the Insolvency and Bankruptcy Code (IBC), incorporating provisions that allow homebuyers to be treated on a par with financial creditors, and giving them first right for recovering dues.