The Insolvency and Bankruptcy Code, 2016 (IBC) is a transformative piece of legislation in India, designed to streamline the resolution of insolvency for corporate entities, partnership firms and individuals. Enacted to replace a fragmented and inefficient insolvency framework, the IBC aims to maximize asset value, promote entrepreneurship, enhance credit availability and balance stakeholder interests in a time-bound manner. A key aspect of the IBC is its structured approach to creditor rights, distinguishing between financial creditors (e.g., banks and financial institutions) and operational creditors (e.g., suppliers and service providers). This article talks about the rights of operational creditors under the IBC, 2016, focusing on their role in insolvency proceedings, their priority in repayment and the evolving legal landscape shaped by judicial decisions and proposed reforms.
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Definition of Operational Creditors
Under Section 5(20) of the IBC, an operational creditor is defined as "any person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred." Section 5(21) defines operational debt as "a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority."
Operational creditors typically include:
Suppliers and Vendors: Entities providing goods or services, such as raw materials or utilities.
Employees: Individuals owed wages or other employment-related dues.
Government Entities: Authorities collecting statutory dues, such as taxes or GST.
This difference between operational and financial creditors is unique to the IBC and significantly influences their respective rights and roles in the insolvency process.
Also read about Section 12A of IBC, 2016.
Rights of Operational Creditors under the IBC, 2016
IBC grants specific rights of Operational creditors in order to protect their interests during insolvency proceedings. These rights are outlined below:
1. Right to Initiate Insolvency Proceedings
Operational creditors can initiate the Corporate Insolvency Resolution Process (CIRP) under Section 9 of the IBC when a corporate debtor defaults on an operational debt. The process is as follows:
Step | Description |
Demand Notice | The operational creditor sends a demand notice to the corporate debtor, detailing the unpaid debt and demanding payment. |
Payment Period | The debtor has 10 days from receiving the notice to pay the debt or dispute its validity. |
Application to NCLT | If no payment is made, the creditor can file an application with the National Company Law Tribunal (NCLT) within 3 years from the date the debt became due. |
NCLT Decision | The NCLT must admit or reject the application within 14 days. |
CIRP Commencement | If admitted, CIRP begins, with a moratorium declared and an Interim Resolution Professional (IRP) appointed. |
The application must include a proof of the debt like invoices or contracts along with evidence of the demand notice. In case the debtor disputes the debt, the creditor must substantiate its claim before the NCLT. This right empowers operational creditors to seek legal recourse for unpaid dues and ensures they are not left without remedy.
2. Role in the Insolvency Resolution Process
Once CIRP is initiated, operational creditors have a limited but defined role like submission of claims, committee of creditors and resolution plan review:
Claim Submission: Operational creditors submit their claims to the IRP or Resolution Professional (RP) for verification and inclusion in the creditor list.
Committee of Creditors (CoC): Under Section 21, the CoC primarily comprises financial creditors and operational creditors generally lack voting rights. However, if there are no financial creditors, a CoC of operational creditors may be formed. Additionally, operational creditors with dues exceeding 10% of total claims may gain voting rights in specific cases.
Resolution Plan Review: Operational creditors receive the proposed resolution plan and can raise objections if it fails to address their claims adequately, but still they cannot vote on its approval.
3. Priority in Repayment
In liquidation, the IBC establishes a priority waterfall under Section 53 for asset distribution:
Priority | Recipient |
1st | Insolvency resolution and liquidation costs |
2nd | Workmen’s dues (24 months prior) and secured creditors |
3rd | Employee wages and dues (12 months prior) |
4th | Unsecured creditors (including operational creditors) |
5th | Government dues (2 years prior) |
6th | Remaining debts |
Last | Equity shareholders |
Operational creditors, classified as unsecured creditors, rank below secured creditors and employees but above equity shareholders. In resolution plans, Section 30 mandates that operational creditors receive at least the amount they would get in liquidation under Section 53, ensuring a minimum level of protection. Once approved by the CoC (with a 66% vote) and sanctioned by the NCLT, the resolution plan is binding on all creditors, including dissenting operational creditors (Section 31).
Summary
Rights of operational creditors under IBC include the ability to initiate CIRP, submit claims and receive prioritized payments in liquidation. But, their limited voting power and lower recovery rates highlight ongoing challenges. Judiciary has clarified their protections, while proposed reforms signal a move toward greater equity. As the Insolvency and Bankruptcy Code evolves, operational creditors must actively engage in the process in order to safeguard their interests, with potential legislative changes promising a more balanced framework.
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Rights of Operational Creditors under IBC: FAQs
Q1. What are the rights of creditors under IBC?
Creditors under the Insolvency and Bankruptcy Code (IBC) have rights to initiate insolvency proceedings, participate in the Committee of Creditors (CoC) (for financial creditors), receive payments per the resolution plan or liquidation waterfall and challenge unfair plans.
Q2. What is an operational creditor under IBC?
An operational creditor is a person or entity owed debts for goods, services, or operational dues, like suppliers or employees, but they lack voting rights in the CoC.
Q3. What is Section 24 of the IBC?
Section 24 mandates that operational creditors with claims above a threshold receive CoC meeting notices and can attend but cannot vote on resolution plans.
Q4. What is Section 43 of the IBC case law?
Section 43 addresses preferential transactions, allowing avoidance of transfers benefiting specific creditors within a look-back period (one year generally, two years for related parties) if not in the ordinary course of business.
Q5. What are the rights of a creditor?
Creditors can demand repayment, initiate insolvency under IBC, participate in resolution processes (voting for financial creditors), receive distributions per IBC’s priority and pursue subrogation or legal remedies if applicable
