‘Pay up or we go to NCLT’ is proving to be a very credible threat
That 44% of the petitions dismissed by NCLT were either settled or withdrawn indicates that operational creditors got their dues back in a large number of cases
It’s been about a year since the National Company Law Tribunal (NCLT) started disposing of applications made under the new Insolvency and Bankruptcy Code. What are the trends that are emerging from NCLT’s decisions?
Data collated by researchers at the Indira Gandhi Institute of Development Research shows that operational creditors have been fairly successful in recovering dues thanks to the new bankruptcy code. The study is based on NCLT orders uploaded on its website.
Between December 2016 and August 2017, operational creditors filed 267 petitions with NCLT, or 52% of the total number of petitions filed. About a third of these cases (86 petitions) have been admitted by NCLT and are in various stages of the insolvency process. Among the petitions that were dismissed, 79 or about 44% were either settled or withdrawn, indicating that operational creditors got their dues back in a large number of cases.
Bhargavi Zaveri, a researcher at IGIDR, says that while NCLT orders do not specify the reason petitions are withdrawn, many of them would be on account of out-of-court settlements.
It’s little wonder there has been a rush of filings by operational creditors at NCLT, far outpacing petitions made by financial creditors. Operational creditors have finally gotten hold of a useful tool to get their dues back from defaulting companies. When the bankruptcy code is triggered, an insolvency professional is given charge of the business and the management of the company can be temporarily dispossessed. The prospect of losing control is causing defaulting companies to settle, especially in cases where the dues are relatively small.
The Reserve Bank of India’s latest Financial Stability Report makes the important point that operational creditors, such as trade suppliers, employees, or workmen, have been empowered by the bankruptcy code. “Such creditors were served neither by previous restructuring mechanisms (such as SICA) nor the existing recovery mechanisms (such as SARFAESI)”, the report states. SICA (Sick Industrial Companies Act) and SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act) empowered financial creditors.
“While there are some voices of concern that the bankruptcy code is being used as a recovery tool, we don’t view this as a necessarily bad thing, especially if, in the long run, it alters the behaviour of debtors and incentivizes them to pay the dues of operational creditors before they petition the NCLT for triggering the code,” says Zaveri. Besides, operational creditors are small and medium enterprises (SMEs), who can themselves be bankrupted if a large customer defaults on payments. As such, their effective use of the bankruptcy code is a welcome development.
As Zaveri says, the dominance of operational creditors in NCLT applications can be expected to decline with time. When defaulting companies see that many operational creditors have put the code to effective use, they will soon start settling dues before an application is sent to NCLT. The way things are going, that day doesn’t seem too far.