Operational creditors should get voting rights proportionate to their debt under IBC, says SC

Operational creditors of bankrupt firms have often landed a raw deal under the two-year-old Insolvency and Bankruptcy Code. For instance, engineering and construction major L&T, an operational creditor of Bhushan Steel Ltd had to move multiple courts in an attempt to recover its dues of Rs 900 crore, a petition dismissed by the National Company Law Appellate Tribunal (NCLAT) in August.

Then, last month, on a petition filed by nearly 3,000 suppliers of Binani Cement, the NCLAT had ruled that operational creditors of beleaguered firms cannot be discriminated against during bankruptcy proceedings. This stand formed the basis for UltraTech Cement's late bid for Binani Cement getting the nod over the bid submitted by the declared highest bidder, Dalmia Bharat - a decision that the Supreme Court subsequently upheld.

There could be more good news in the offing for this category of stakeholders in a corporate debtor. The top court on Monday suggested that operational creditors - such as such as suppliers of products and services to bankrupt companies - be given a voice in the resolution proceedings in proportion to their debt, including voting rights, The Economic Times reported. A two-judge bench led by Justice RF Nariman is hearing a clutch of petitions challenging several provisions of the IBC as arbitrary and discriminatory.

Also read: IBC has aided pick up in recoveries: Government

Currently, the committee of creditors (CoC) constituted for bankrupt firms only comprise all financial creditors, like banks. And since operational creditors don't have a place in the CoC, they have no voting rights when the committee decides on what to do with an asset. Justice Nariman pointed out that even in cases where the operational creditors' debt is huge, they currently don't have a say in the insolvency process.

According to the daily, during the hearing, some argued on the need to keep all promoter creditors of defaulted companies out of the resolution process, while others stressed that without their involvement, creditors would fail to recover the true value of assets. Some also sought a provision for debtors to be heard even when insolvency proceedings are initiated by the financial creditor.

Also read: IBC forces companies to settle Rs 1.2 lakh crore debt out of court

However, Attorney General K.K. Venugopal, in his opening arguments for the government, defended the IBC as a key piece of economic legislation that has aided recovery of loans for banks and cited several figures to claim that the process was robust. "There have been signs of recovery after the introduction of the IBC over previous years. Credit realised by banks have risen. Bank growth has accelerated to touch double digits," said Venugopal.

The bench is expected to resume hearing of the case next month, once the court reconvenes post the winter recess.