(First Published on Linkedin)
The IBC Code is aimed at maximizing the value of distressed assets while ensuring equitable treatment for all stakeholders. However, a critical question arises: Is the current constitution of the Committee of Creditors (CoC), comprising solely of Financial Creditors, truly aligned with the preamble of the IBC? Could this structure inherently lead to a potential subservience or conflict of interest, particularly when it comes to protecting the interests of Operational Creditors?
Background:
Under the IBC, the CoC is vested with significant power to make decisions regarding the resolution of a Corporate Debtor. Financial Creditors, who primarily constitute the CoC, vote on the Resolution Plan, often focusing on recovering as much of their debt as possible. Operational Creditors, however, do not have voting rights and are frequently left out of the decision-making process. This framework has led to instances where the claims of Operational Creditors are either minimized or overlooked, raising concerns about fairness and the equitable distribution of resources. In a recent NCLAT decision, this principle was reaffirmed, even when the operational creditors had a NIL payout.
Key Takeaways:
1. Potential Subservience and Conflict of Interest: The composition of the CoC, predominantly of Financial Creditors, can lead to a scenario where the interests of Operational Creditors are subordinated. The Financial Creditors’ primary goal is to maximize their recovery, which may conflict with the interests of Operational Creditors, who might be left with negligible payouts.
2. Alignment with the IBC’s Preamble: The preamble of the IBC emphasizes a balanced approach towards the interests of all stakeholders. The current CoC structure, however, raises questions about its alignment with this objective. Are we, in our pursuit of financial recovery, compromising the broader goal of equitable and fair treatment?
3. Need for Legislative Change: There is an urgent need to reconsider the constitution of the CoC. Should Operational Creditors have a more significant say, especially when their contributions to the business’s ongoing operations are substantial? Could a more inclusive CoC prevent potential conflicts of interest and ensure a fairer resolution process? Probably through enhanced representation of operational creditors or a guaranteed payout in proportion to the payout to the financial creditors, could be certain changes to IBC that the government could consider.
The IBC was designed to bring about a holistic and equitable insolvency process. However, the exclusion of Operational Creditors from the CoC’s decision-making power could undermine this objective. The path to a more inclusive insolvency process begins with addressing these structural imbalances.