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The continued suspension of new insolvency proceedings has hit not just recovery for lenders, but also affected small businesses who typically form the bulk of suppliers to many corporates.

Operational creditors are those seeking to recover their dues with respect to goods or services they have provided, while financial creditors are the lenders. The government restricted fresh cases under the Insolvency and Bankruptcy Code (IBC), first for six months till 25 September, and then for three more months till 25 December.

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According to latest data since inception till 30 September, operational creditors formed the majority of those dragging companies to National Company Law Tribunal (NCLT) benches across the country. Of the 4,008 corporate insolvency resolution process (CIRP), 2,017 were initiated by operational creditors, 1,730 by financial creditors and the rest by companies themselves.

“These smaller creditors who have receivables pending from corporates have been affected by the suspension. More than half of all cases initiated by these creditors used to get settled before the admission stage, leading to recoveries," a banker-turned resolution professional said on condition of anonymity.

India’s Insolvency and Bankruptcy Code (IBC) is not a tool for recovery but is meant for resolution of stress in companies, lawyers said, adding that smaller creditors have nonetheless been using this as a means to recover receivables.

While operational creditors have recourse to other legal measures, the bankruptcy court route seems to be more effective. “The petitions filed by operational creditors are generally aimed at quick recovery instead of approaching other forums. Though the forum and code are not meant for recovery, the number of settlements before the admission of petitions suggests that the petitions are aimed at recovery only. Before-admission settlements in the case of operational creditors are higher than the financial creditors," said Ashish Pyasi, associate partner, Dhir and Dhir Associates.

Pyasi explained after the initiation of the resolution process, operational creditors get little or nothing, as in most cases, the liquidation value is almost nil for operational creditors. In some big accounts, Pyasi said, operational creditors have been given some value towards their claims but in most cases, the recovery is almost nil.

What has also hit operational creditors is the rise in the threshold for initiating IBC proceedings to 1 crore, from 1 lakh earlier. This meant that operational creditors whose dues are not large enough can’t use IBC.

Sitesh Mukherjee, a Delhi-based lawyer specializing in bankruptcy said that resorting to IBC isn’t an efficient recovery mechanism for such creditors. They should, instead, go through the process of civil court, arbitration or commercial court to resolve their disputes.

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