THE DISCRIMINATION AMONGST CREDITORS

The Code provides special powers to the Financial Creditors who are broad enough to dominate & discriminate against Operational Creditors at the time of the establishment of the Committee of Creditors by the Insolvency Resolution Professional, who has the power to gather all of the claims against the Corporate Debtor. All COC members will then vote on the Resolution plan and repayment schemes to complete the Corporate Debtor Insolvency Resolution Process.

Certain provisions of IBC specifically exclude Operational Creditors. They require all Financial Creditors of the concerned Corporate Debtor as members of the CoC, except certain groups of Financial Creditors or their representatives who are associated parties to the Corporate Debtor.

In any case, Sections 21 and 24 of the Code are discriminatory and manifestly arbitrary in that Operational Creditors do not have even a single vote in the Committee of Creditors, which has a vital role in the Corporate Debtors revival process. An Operational Creditor’s privileges are restricted to initiating CIRP against the Corporate Debtor.

In the case of Damodar Valley Corporation, Hon’ble Supreme Court believed that Operational Creditors and Financial Creditors are not paid the same amount and percentage, which cannot be said to be inequitable. It is settled that the Code and the Regulations do not contemplate that there could be equal treatment for all creditors. The Apex court further observed that equitable treatment of creditors is only within the same class. The payment to the creditors and the manner of distribution had come up for consideration from time to time. The ILC Report 2018 deliberated upon the objection to Section 30 (2) (b), insofar as it provides for a minimum payment of liquidation value which is guaranteed to the Operational Creditors may be negligible as they fall under the residual category of creditors as per Section 53 of the Code.

The Insolvency Act, 1986 United Kingdom, The Singapore Companies Act, and The Companies Act, 2013 do not differentiate between the position held by Operational Creditors and Financial Creditors. However, they do distinguish between the importance given to a secured and unsecured creditor. (although there are varying priorities for government dues, employee dues, etc.). The Bankruptcy Legislative Reforms Commission (BLRC) recommends differentiation in the importance given to Financial Creditors and Operational creditors and advises that the CoC ought to be competent enough to assess the ground reality and alter the terms and conditions of the liability during their meetings. As in many cases, the Operational Creditors cannot decide with respect to the solvency/insolvency of the Corporate Debtor or take the burden and exposure of delaying inflow of funds in the hope of better opportunity for the corporate debtor, as a result of which the BLRC thought that including only Financial Creditors would make the process more swift and effective. This priority allocation often leads to Operational Creditors with no payment at all.

Hence, it is evident that an Operational Creditor is discriminated against as he is not included as a member of CoC and doesn’t enjoy any of the rights provided to FC. Furthermore, there is a limited aspect of protection of the interest of the Operational Creditor in the Code. In addition, some provisions limit the rights of an Operational Creditor to attend such a CoC meeting, stating that Operational Creditors whose aggregate dues are at least 10% of the total debt payable by the Corporate Debtor may attend the CoC meeting but not participate or vote, as per Section 24(4) which provides that the directors, partners and one representative of Operational creditors, as referred to in sub-section (3), may attend the meetings of the committee of creditors, but shall not have any right to vote in such meetings.

Judgments by the Hon’ble Supreme Court, High Courts, Hon’ble NCLAT and Ld. NCLT have found that the provisions of IBC does not violate the Articles of the Indian Constitution, but the reality seems different. For a clear picture, it is necessary to understand the mind of the drafters of the legislature. The differentiation leading to discrimination of Operational Creditors in the insolvency process is in contravention of the principles of natural justice and equality enshrined in the Constitution. Furthermore, the IBC’s self-proclaimed mission is to “maximize the value of the Corporate Debtor’s properties” and “balance the interests of all stakeholders.” In light of this, the complete disenfranchisement and disrespect for the Operational creditors’ interests appear unjustifiable.