Jan 7, 2019

A Leg-up for MSMEs: Interests of operational creditors to be secured under insolvency code

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Operational creditors (OCs), mostly MSMEs, may soon cease to get short shrift by the financial creditors, their mightier counterparts. The government is set to equip the OCs with more power under the Insolvency and Bankruptcy Code (IBC). Sources told FE that the plans include according voting rights to OCs like raw material suppliers in proportion to their claims from the defaulter (as admitted by the NCLT) and making them part of the committee of creditors (CoC). Also on the anvil are certain safeguards for them to receive proceeds as stressed firms go for liquidation.

Currently, only financial creditors are part of the CoC that decides on a resolution plan and selects the winning bidder. Also, as OCs are typically unsecured and placed behind financial creditors (who account for a large share of the default claims) to get liquidation proceeds, they practically end up getting nothing in most cases.

While financial creditors will still call the shot in the CoC in most cases due to their overwhelmingly large share in default amounts, voting rights to operational creditors will enhance their role, especially in cases of small stressed companies that rely heavily on commodity supplies.

Also, their role would be crucial for withdrawing an insolvency application after admission by NCLT, which requires approval by 90% of the CoC. Of course, the existing framework too has certain safeguards for OCs. For instance, they get a chance to put forth their views to the CoC only when their claims exceed 10% of the total default amount, said analysts. But since they don’t have any voting right, this provision doesn’t mean much.

An arrangement in step with that for homebuyers, who were granted the financial creditors status last year under the IBC, may be explored in case of operational creditors, albeit with certain changes, said the sources. Manoj Kumar, head (M&A, transactions and insolvency) at consultancy firm Corporate Professionals Capital, said, ideally, operational creditors should not be discriminated against in a resolution process and their role should be defined in sync with their stake in the matter. A company can’t operate without operational creditors.

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