The untold story of operational creditors under IBC: How small players are left out in the recovery game

Nearly a decade after the Insolvency and Bankruptcy Code, 2016, came into force, it has undergone many amendments to address practical challenges and advance its core objective. The code enables financial creditors (lenders) to recover their financial debt, whether through value-maximising resolution plans during the Corporate Insolvency Resolution Process (CIRP) or, failing that, via liquidation recoveries.

However, operational creditors—suppliers, service providers, employees (other than workmen), and statutory authorities have not enjoyed comparable outcomes when it comes to their operational debt, despite being indispensable to the corporate debtor’s operations and integral to any successful post-resolution business continuity.

Their dilemma is not a hidden narrative; it repeatedly surfaces before judicial forums, where they often report either receiving nothing for their admitted claims or amounts so nominal as to be functionally negligible. Correcting this imbalance in totality is not possible, but even achieving some parity also requires further amendments to the code.

Prima facie, IBC and rules and regulations made thereunder favour financial creditors, particularly secured lenders who exercise decisive control over the CIRP and liquidation process through the Committee of Creditors (CoC) and stakeholder committees, respectively.

Although an operational creditor with claims exceeding 10% may attend CoC meetings, they lack voting rights. In the statutory distribution waterfall (waterfall mechanism), operational creditors rank low in priority, whether distributions occur pursuant to an approved resolution plan or in liquidation.

While financial creditors in some cases of corporate debtors being resolved through CIRP/liquidation have realised their claims in the range of 70–80%, operational creditors, on the other hand, rarely have achieved anything close, irrespective of their criticality to the debtor’s business.

This disparity persists as operational creditors are obliged to continue supplying essential goods and services during CIRP to keep the debtor as an ongoing concern. Although supplies made during CIRP are treated as CIRP costs and paid on actuals, the timing and realities on the ground often mean that, by the time such payments materialise, many operational creditors, particularly smaller firms, face acute liquidity stress or even their own insolvency, precipitated by unrecovered dues from the big corporate debtor.

Courts and tribunals have generally deferred to the commercial wisdom of the CoC on questions of plan viability and distribution towards operational creditors, intervening only to ensure statutory compliance or the amount set aside for operational creditors in the approved resolution plan is paid in the manner as mandated under the Code.

Consequently, operational creditors’ challenges to plans that allocate them a nil amount, a token sum, or purely ex gratia payments are frequently unsuccessful. This jurisprudence underscores the need for legislative and regulatory fine-tuning to better align the code with its stated objective of balancing stakeholder interests.

Moving toward a more equitable framework for operational creditors requires targeted reforms that preserve the code’s core design while correcting ingrained asymmetries. The following measures can be considered:

· Grant limited voting rights to operational creditors on decisions that directly affect their interests, without equating those rights to financial creditors. Analogous models exist, such as voting rights accorded to preference shareholders under the Companies Act, 2013, or the representation of creditor classes through authorized representatives under the IBC.

· Earmark a defined percentage of the total consideration under a resolution plan or liquidation proceeds for operational creditors, coupled with a clear, waterfall-like distribution mechanism among various categories of operational creditors.

• Clarify the contours of “operational debt” as uncertainties persist on what falls within its ambit, leading to inconsistent treatment and disputes.

• Reduce the monetary threshold for filing applications under Section 9. Following the increase to ₹1 crore, many MSMEs and employees with smaller claims are effectively excluded from initiating insolvency proceedings, despite being among the most vulnerable creditors.

• Mandate reasoned decisions by insolvency professionals when rejecting or not admitting operational creditors’ claims. Even at the plan approval stage, claims are often left “unverified” or “under verification,” undermining transparency and trust in the process.

The IBC’s objectives are explicit: time-bound reorganisation and insolvency resolution to maximize asset value, promote entrepreneurship and credit availability, and balance the interests of all stakeholders. Yet operational creditors—undeniably stakeholders—have borne the brunt of systemic preferences, resulting in disproportionate detriment to those who are vital to the debtor’s ongoing operations.IBC’s success will be fully realised only when the interests of operational creditors are substantively integrated into the code’s design and practice, without disturbing its foundational architecture.

Meaningful reform that improves their participatory rights, clarifies claim treatment, and guarantees fairer distributions will help ensure that the Code lives up to its promise for all constituents, not just the most secured among them.

(The author is Managing Partner, S&A Law Offices. Views are personal.)