Treatment Of Operational Creditors Under Insolvency And Bankruptcy Code, 2016: An Analysis Of Recent Jurisprudence

Unlike FCs, the OCs must satisfy certain additional procedural pre-requisites to initiate the corporate insolvency resolution process (“CIRP”) against the defaulting party/ Corporate Debtor (“CD”). During the process, the FCs enjoy exclusive membership and voting rights in the Committee of Creditors (“CoC”), including the power to approve or reject a resolution plan. The OCs are excluded from decision-making, barring the exception wherein there are no FCs. Even in terms of recoveries, OCs almost invariably rank lower in priority under resolution plans or liquidation proceeds of such CD. The underlying rationale for this differential treatment lies in the assumption that the FCs have greater skin in the game and are better equipped to assess the viability of a distressed debtor, whereas OCs are primarily concerned with recovering their dues and are not interested in ensuring the survival of the Corporate Debtor.

Without examining the merits of this rationale, it has been observed that, in practice, it has translated into discriminatory outcomes. The recovery rate for OCs under resolution plans are more often than not NIL or negligible, irrespective of the size or criticality of their claims.^[3] Further, for Micro, Small & Medium Enterprises (“MSMEs”) and startups, which depend heavily on receivables for their survival, such outcomes could trigger a domino effect of insolvencies across the country. This piece aims to examine the legal framework that governs the treatment of OCs in CIRP and liquidation under the IBC, contrast it with ground realities by drawing on available data and recent judicial pronouncements, and explore potential reforms to achieve a fair balance.

Legal Framework: Sections 30(2)(B) and 53 of the IBC

Section 30(2)(b) of the IBC establishes the minimum amount that OC(s) must be paid under a resolution plan.^[4] Under the said provision, the OC(s) cannot receive less than the higher of the following: (a) what they would receive if the corporate debtor were liquidated and the proceeds from the sale of its assets were distributed as per the order of priority under Section 53 of the IBC, or (b) what they would receive if the amount available under the resolution plan were distributed under Section 53 of the IBC.

In addition, Regulation 38(a) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“IBBI Regulations”) was intended to reinforce the safeguard under Section 30(2)(b) of the IBC by requiring that payments to OCs be made in priority over FCs under a resolution plan.^[5] Therefore, one might argue that the framework appears to provide a safety net for OCs and to ensure that they are not worse off under CIRP than they would have been in liquidation. In practice, however, this protection often proves to be redundant. In a given scenario, when it comes to distribution under Section 53 of the IBC, the OCs generally rank below FCs, workmen/employees, and government dues, and are often left with little or no recovery of their outstanding debts. It is pertinent to note that while OCs who are secured would theoretically be treated on par with secured FCs, however, this rarely occurs in practice, considering that the OCs are generally unsecured. For instance, a financial institution such as a bank/ non-banking financial corporation typically would not extend a credit facility to a CD without any collateral/ security, whereas a vendor supplying goods and/or services, i.e., an OC will rarely demand any collateral from the CD.

In order to understand the redundancy of the safety net, as stipulated under Section 30(2)(b) of the IBC, let us consider a situation where the CD who owes an amount of INR 100,00,00,000/- (Indian Rupees Hundred Crore) to secured FCs, an amount of INR 20,00,00,000/- (Indian Rupees Twenty Crore) towards employees' dues for a period of 24 months, and INR 20,00,00,000/- (Indian Rupees Twenty Crore) to its suppliers of goods and/or services, i.e., OCs. Now, if the liquidation value of the assets of the CD is INR 50,00,00,000/- (Indian Rupees Fifty Crore), the entire proceeds would be exhausted by the secured FCs and employees, leaving the OC(s) with little to no recovery.

Similarly, even if a successful resolution plan approved by the CoC provides an amount of INR 60,00,00,000/- (Indian Rupees Sixty Crore) for distribution, the distribution mechanism, as provided under Section 53 of the IBC, still ranks the OCs after secured FCs, employees, government dues, and therefore, again results in a NIL payout. Thus, in such cases, Section 30(2)(b) of the IBC and Regulation 38 of the IBBI Regulations offer no meaningful benefit to the OC(s).

This position has been reinforced by the Supreme Court of India in Essar Steel India Ltd. Committee of Creditors vs. Satish Kumar Gupta,^[6] wherein the Apex Court has held that the commercial wisdom of the CoC is paramount and cannot be interfered with, provided that the minimum requirements under Section 30(2)(b) of the IBC are met. In effect, this ruling means that even where distributions under a resolution plan are highly unequal or discriminatory, so long as the statutory floor, however low or even NIL, is complied with, such treatment is beyond judicial scrutiny. As an outcome, OCs are effectively excluded from any meaningful protection under the IBC framework. The successful resolution plans as approved by the CoC generally allocate only a token or NIL amount, merely to satisfy the letter of Section 30(2)(b) of the IBC. Meanwhile, the FCs, who constitute the CoC and control the distribution mechanism, secure substantial recoveries, often leaving the OCs out to take a haircut. This pattern, repeatedly upheld under the shield of “commercial wisdom”, has been reflected in several judicial pronouncements, as discussed in the subsequent section.

Recent Jurisprudence

While the National Company Law Tribunal, and  National Company Law Appellate Tribunal (“NCLAT”) have consistently upheld the legislative framework of Section 30(2)(b) of the IBC, and the primacy of the CoC's commercial wisdom, they have expressed unease at the consequences faced by the OCs in several instances.

In Binani Industries Ltd. vs. Bank of Baroda (2019),^[7] the NCLAT cautioned that if the interests of OCs were persistently ignored, suppliers would refuse to extend credit and insist on advance payments, thereby frustrating the IBC's objective of ensuring business continuity. Therefore, it was observed that it was necessary to balance the rights of FCs and OCs and ensure that neither of them is discriminated. In Damodar Valley Corporation vs. Dimension Steel (P) Ltd., (2022),^[8] the  NCLAT noted that they were consistently receiving plans wherein the OCs were being paid only “miniscule amounts”, sometimes even lesser than 1% of their admitted claims. While such treatment complied with the requirement under Section 30(2)(b) of the IBC, it was observed that the “time has come” to consider whether changes in the legislative scheme are warranted to ensure fairer treatment of OCs. In fact, in this particular instance, the NCLAT even forwarded the copy of its order to the Ministry of Corporate Affairs and the Insolvency and Bankruptcy Board of India, to consider and take necessary steps, if they deem fit.

The observations rendered by the NCLAT in Damodar Valley Corporation (Supra.), was reiterated recently in the matter of Rajat Metaal Polychem Pvt. Ltd. vs. Neeraj Bhatia (2024),^[9] wherein the NCLAT held that as the law currently stands, the OCs are denied any payment where their entitlement in liquidation is NIL. The NCLAT further observed that until and unless the legislature intervenes to amend the statutory framework, the hands of the courts remain tied.

In another instances, the NCLAT in Masyc Projects (P) Ltd. vs. Pulkit Gupta (2025),^[10] yet again recognized that the OCs were being reduced to residual claimants and were being left with either NIL or negligible recoveries. However, it held that in view of the limited jurisdiction conferred upon it to interfere with the commercial wisdom of the CoC, it could not interfere with the resolution plan. If one may carefully analyse the continued line of judgments, it is more than apparent that the “Operational Creditors” often are being treated discriminatorily by the CoC amongst other class of creditors. Further, the treatment meted out to OCs, within the current legislative framework, leaves them no scope to intervene, and any reform can only come through legislative amendment. Although the IBC (Amendment) Bill, 2025^[11] presented an opportunity to address these long-standing concerns of Operational Creditors, it fell short of doing so. The framework governing resolution plans and liquidation proceeds for Operational Creditors remains unchanged, and the bill does not provide any alternative relief or protection for the OCs. Therefore, there continues to remain a pressing need for legislative overhaul to ensure fair treatment and meaningful safeguards for OCs under the IBC.

The Way Forward

While the current scheme under the IBC may turn out to be economically unsustainable in the long run, especially if OCs who form the backbone of the Indian economy, are consistently deprived from recovering their dues, or continue receiving negligible amounts, the credit chain that sustains the corporate ecosystem in India is bound to suffer at a macro level. For MSMEs and startups, which largely depend on receivables to sustain themselves, the failure to receive any payment under the CIRP/ liquidation could trigger a cascading chain of insolvencies, thereby affecting not only individual enterprises but also the broader corporate ecosystem. There is, therefore, an urgent need for reform to safeguard these pillars of the corporate ecosystem. Some of the measures which deserve consideration:

1. Calibrated waterfall for operational creditors: The legislature may consider bringing an amendment to Section 53 of the IBC, to distinguish between classes of operational creditors. For e.g., MSMEs, statutory dues, and trade suppliers, and accord them differential but fairer priority. This mechanism was followed in NCC Ltd. vs. Golden Jubilee Hotels Pvt. Ltd. (2024) ^[12], wherein the NCLAT dismissed four company appeals preferred by OCs challenging a resolution plan; wherein the CoC had approved a pay-out to some “Special Operational Creditors” who were the lessors of the hotel land on which the CD had constructed its hotel. In this scenario, these special OCs recovered 100% of their admitted claims, however, the other OCs were given NIL payments. The NCLAT held that the differential treatment was justified, considering that these land lessors were essential to maintaining the CD/ Hotel as a going concern. However, it may be noted here that the current system relies wholly on the discretionary commercial wisdom of the CoC to approve such distinctions. Instead, a formalized calibrated waterfall mechanism would institutionalize protections for various classes of OCs rather than leaving their fate entirely to the discretion of the CoC.

2. Secured operational creditors: There is a need for encouraging contractual frameworks wherein the large suppliers can secure their credit, akin to the FCs. If an OC holds a valid security interest (for example, a statutory/contractual charge, pledge, hypothecation), it shall be entitled to recover its dues in priority over unsecured creditors, which has been recognized by the Supreme Court of India in Paschimanchal Vidyut Vitran Nigam Ltd. vs. Raman Ispat Pvt. Ltd. & Ors. ^[13]

3. Mandatory floor for recovery: Introducing a statutory minimum percentage recovery for OCs (for e.g., 10-15% of admitted claims), irrespective of the liquidation value. Currently, OCs only have a liquidation‑value‑linked floor and there is no fixed minimum percentage in the IBC. Establishing the latter would provide certainty and eliminate the risk of NIL or minimal pay-outs.

4. Participation in the CoC: Introducing non-voting representation for OCs in the meetings of the CoC, particularly the largest OCs by value, would ensure that their perspectives are placed on record and factored into the decision-making process, even if they do not participate in the voting process.

The IBC has undoubtedly transformed India's insolvency landscape, but its treatment of OCs remains one of its weakest links. Recent judicial observations in Damodar Valley, Rajat Metaal, and Masyc Projects underscore the urgent need for legislative overhaul. This concern is further reflected in filing patterns under the IBC. In the initial years of the enactment of the IBC, a greater number of CIRPs were triggered by OCs compared to FCs,^[14] as can be seen in the table below:

From the above data, it is clear that while the OCs drove a majority of CIRP filings in the early years of the IBC, their participation has declined in recent times. It may be argued that this decline underscores the absence of meaningful protection for OCs under the current framework, particularly in light of the recurring incidences of NIL or minimal plan pay-outs. As a result, OCs are increasingly reluctant to resort to the IBC as a viable mechanism.

Although the IBC (Amendment) Bill, 2025, presented an opportunity to address these inequities, it fell short. The amendment does not alter the distribution framework for OCs, provide any minimum recovery percentage, or introduce any mechanism to safeguard their interests. By leaving the primacy of the CoC's commercial wisdom and the existing waterfall mechanism untouched, the 2025 amendment represents a missed opportunity to restore balance amongst the various classes of creditors.

It is important to appreciate that the economy does not rest solely on the shoulders of financial institutions, but it is equally supported by suppliers, employees, and service providers who constitute the backbone of commerce. Thus, a framework that systematically marginalizes OCs not only undermines fairness but also threatens the sustainability of the insolvency regime itself. As the Parliament considers the next wave of IBC reforms, ensuring meaningful protection for OCs must be treated as a priority.

References

[1] Insolvency and Bankruptcy Code, 2016, § 5(7), No. 31, Acts of Parliament, 2016 (India).

[2] Insolvency and Bankruptcy Code, 2016, § 5(20), No. 31, Acts of Parliament, 2016 (India).

[3] Damodar Valley Corporation. vs. Dimension Steel (P) Ltd., (2023) 21 Comp Cas-OL 563.

[4] Insolvency and Bankruptcy Code, 2016, § 30(2)(b), No. 31, Acts of Parliament, 2016 (India).

[5] IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, Regulation 38(a).

[6] Essar Steel India Ltd. Committee of Creditors vs. Satish Kumar Gupta, (2020) 8 SCC 531.

[7] Binani Industries Ltd. vs. Bank of Baroda, 2018 SCC OnLine NCLAT 521.

[8] Damodar Valley Corporation. vs. Dimension Steel (P) Ltd., (2023) 21 Comp Cas-OL 563.

[9] Rajat Metaal Polychem Pvt. Ltd. vs. Neeraj Bhatia, 2024 SCC OnLine NCLAT 1050.

[10] Masyc Projects (P) Ltd. vs. Pulkit Gupta, 2025 SCC OnLine NCLAT 1272.

[11] Insolvency and Bankruptcy Code (Amendment) Bill, 2025, Bill No. 107 of 2025.

[12] NCC Ltd. vs. Golden Jubilee Hotels Pvt. Ltd., 2024 SCC OnLine NCLAT 205.

[13] Paschimanchal Vidyut Vitran Nigam Ltd. vs. Raman Ispat Pvt. Ltd. & Ors., 2023 INSC 625.

[14] Quarterly Newsletter of the Insolvency and Bankruptcy Board of India, January - March 2025, Volume 34, Page 11, https://ibbi.gov.in/uploads/publication/912e97d4d9f96651386541fb7059203b.pdf.

Author Details:

Palash Taing, Principal Associate - TLH, Advocates & Solicitors palash.t@tlh.law

Shobhna Vijay, Associate - TLH, Advocates & Solicitors shobhna.v@tlh.law