The Insolvency and Bankruptcy Board of India has consistently strived to amend and strengthen the Code since it was enforced in 2016. In light of all these changes, to further strengthen the Code, the Board has come out with new notifications for the (Fourth Amendment) Regulations. The amendment will directly have an impact on Operational Creditors and will also address the relation of the quantum of their dues.
The Amendment states that Sub-regulation 38(1) of the Regulations stands replaced by the following clause: “The amount due to the operational creditors under a resolution plan shall be given priority in payment over financial creditors.”
The earlier Regulation 38(1)
Originally, Regulation 38(1) stated that a resolution plan will mandatorily provide the source of funds for the liquidation value due to operational creditors. It then provided that;
- such liquidation value ought to be paid in priority to payments to any financial creditor; and
- such payment has to be made within 30 days from the approval of the resolution plan by the adjudicating authority.
As was the interpretation, it regulated that the liquidation value was the bare minimum which had to be paid to operational creditors under the resolution plan and within 30 days from the approval of the resolution plan. It further stated that payments could be made to operational creditors though the same were not mandatory neither were they priority.
The new amended Regulation states that a resolution plan should mandatorily provide the due amount to operational creditors. Under a resolution plan, the operation creditor will be given priority in payment over financial creditors.
There is no minimum amount prescribed for payment to operational creditors under the amended Regulations though sub-section 30 (2)(b) of the Code requires the resolution professional to confirm that the resolution plan provides for the payment of debts of operational creditors which should not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor under Section 53 of the Code. Therefore, the minimum prescribed amount due to operational creditors remains unchanged and the interests of operational creditors, to the extent of the liquidation value of the amount due to them, remain protected under the Code.
The primarily change brought by the Amendment is all payments due to operational creditors as contemplated under a resolution plan, and not just the minimum prescribed amount, have to be made in priority to financial creditors.
What are the implications?
As operational creditors are not part of Committee of Creditors (CoC), the quantum of their dues which are payable under a resolution plan and have been prioritised, is still subject to the approval of only the CoC.
It is important to note that since CoC is under no fiduciary duty to act in the best interest of stakeholders which also includes operational creditors, this may be a tricky situation. Further, there is no provision which statutorily permits NCLT to reject a resolution plan only on the basis of inequity or discrimination under a particular class of stakeholders.
Should the CoC rule against Operational Creditors, they can proceed to NCLT and file in the tribunals for some relief. All payments to operational creditors are prioritized and are now stated to be made before any payment is made to financial creditors can lead to a series of doubts and unfair cut-outs by the CoC.
Even though the Board has been constantly trying to strengthen the Code, the onground reality of the amendments will be clear once the notification is in effect.