Insolvency and Bankruptcy Code, 2016 (IBC) is the central legislation enacted with the several objectives. The objectives laid down under IBC signifies the intent behind the legislation. The most important objectives of IBC include:-
- Resolution or revival of the companies making defaults in discharging liabilities or corporate debtor.
- Maximization of value of assets of the corporate debtor so as to provide maximum benefit to all the creditors.
- Promotion of entrepreneurship
- Availability of credit
- Balancing the interests of all the creditors.
The basic fundamental rationale behind the objectives of the code is to keep the financially distressed companies as going concern and provide maximum benefit to all the creditors.
By all the creditors the code means the financial as well as operational creditors.
Importance of both the kinds of credit
Both the kinds of credit are important for a business entity. Without financial credit business cannot attain capital investment required to run the business while without the goods and services no business can come up with the final product or the required services to be provided by the business.
Financial creditors and operational creditors play equally significant role in the performance of a business entity. Once a company becomes financially incapable the maximization of value of assets of the corporate debtor results in the maximization of the investment made by the both the creditors into the business of the corporate debtor. Therefore, while approving a resolution plan, the resolution professional and the adjudicating authority has to be guided by the principal of equity so that both the creditors receive equal treatment.
Framework with respect to both the creditors
After receiving the claims from all the creditors the Interim Resolution Professional forms a Committee of Creditors (COC) as per section 21 (2) of IBC the COC shall comprise all the financial creditors of the corporate debtor. The operational creditors have not been placed at par with the financial creditors under some provisions of IBC. But, the the regulations framed by the IBC do not provide differential treatment between the financial creditor and operational creditor situated similarly upon the same platform.
The above contention has been affirmed by the adjudicating authorities as well as the Supreme court while interpreting the code.the supreme court in Binani Industries Ltd. vs. Bank of Baroda summarised the role of COC and laid down that:-
- “The liabilities of all the creditors who are not part of Committee of Creditors must also be met in resolution.
- Financial creditors can take haircut and can take their dues in future, while operational creditors need to be paid immediately.
- A creditor cannot maximize his own interests in view of moratorium.
- If one type of credit is given preferential treatment, the other type of credit will disappear from the market which will be against the objective of promoting availability of credit.
- The IBC aims to balance the interests of stakeholders and does not maximize value for financial creditors.
- Therefore, the dues of operational creditors must get at least similar treatment as compared to the due of financial creditors.”
It is to be understood that the objective of IBC is not to provide benefit only to selective creditors but to protect the interests of all the stakeholders. Even if few creditors i.e. financial creditors settle the matter the Corporate Insolvency Resolution Process cannot be terminated by the Adjudicating Authority (NCLT) or Appellate Authority (NCLAT) if there is any illegality.
While keeping the objectives and intent behind the enactment of the IBC, all the creditors are advised to know their rights and exercise them fully when any corporate debtor defaults in making the payments of the debts owed to them.
Disclaimer – Please note that the above view is based on personal interpretation and for general awareness. The readers are required to take opinion from the IBC professionals or Insolvency Professionals before relying on the article. For any clarifications, please write to us at firstname.lastname@example.org