Bankruptcy no tool of operational creditors

Bankruptcy no tool of operational creditors

The Supreme Court’s reported suggestion to give operational creditors a role in insolvency resolution is flawed. Only financial creditors (mainly banks) are now represented on the Committee of Creditors (CoC) that decides whether to keep the distressed company as a ‘going concern’ or to liquidate it. An exception is the homebuyer. The intent of including only financial creditors in the CoC is to recognise the first claim of lenders over secured assets and make the resolution process efficient. Operational creditors supplying goods and services should sue for non-payment, not seek defaulters’ bankruptcy.

However, the Insolvency and Bankruptcy Code allows any creditor, financial or operational, to file insolvency petitions. And data shows that operational creditors dominate the filings. These unsecured creditors find it expedient to arm-twist managements, on pain of losing control, into paying their dues. This should stop. Default in payments to operational creditors should be on par with, say, a bounced cheque, given that these creditors do not have debt enforcement rights. The government should amend the insolvency code to bar operational creditors from filing insolvency petitions. A bankrupt company continuing to trade on the stock market is another absurdity that must go. Its capital must be written down to zero.

Time-bound resolution is the essence of the insolvency code. More the delay in decision-making, more likely that the distressed firm would get liquidated. The liquidation value tends to go down with time, as assets depreciate. A better option is to sell the firm as a going concern. This will help realise the public policy goal of the bankruptcy code to maximise the value of the asset being resolved, and reduce the haircuts for lenders, a burden ultimately on the taxpayer.