Reserve Bank governor Shaktikanta Das recently reiterated that financial creditors should continue to get precedence over operational creditors in insolvency cases. Amid a lot of discontent with the way things have gone with India’s new insolvency laws, the RBI governor reaffirming the primacy of financial creditors is a powerful reminder that policymakers under pressure should not tweak the law so much that it loses its basic character. Of late, there have been outcries over delays in resolution and a high level of haircuts that banks took in those cases. There have been complaints about step-brotherly treatment meted out to operational creditors such as vendors, suppliers, government departments and employees. These ‘weaknesses’ in the Insolvency and Bankruptcy Code (IBC) had even pushed a parliamentary committee to suggest that the IBC should have a threshold over which banks should not take haircuts. There also were calls for balancing the rights of the operational and financial creditors. But such changes might render the IBC toothless.
The IBC is in its early days and the rules are still getting settled. It has seen some early success, with 16 percent of the cases admitted to the National Company Law Tribunal yielding resolution and 19 percent getting withdrawn after settlements. This means 35 percent of debt-ridden companies either saw new management taking over or the old ones taking back control after paying off creditors. The fear of losing control over their companies led to defaulting promoters clearing off debt amounting to Rs 9.33 lakh crore even before their companies were admitted under the code.
The IBC is a commercial law and should not be expected to follow the principles of natural justice. The framers of the code had seen the IBC as a financial creditor-led process because the stakes or risks of financial institutions are higher. The delays in resolution are not because the IBC is unfairly tilted towards financial creditors, but because adjudicating authorities continue to ‘entertain’ petitions from all stakeholders against the resolution. The recovery amounts are decided as per the commercial wisdom of the committee of financial creditors. Several court