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Business News/ News / India/  Bankruptcy cases brought by vendors & suppliers decline, relief for businesses
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Bankruptcy cases brought by vendors & suppliers decline, relief for businesses

Information available from IBBI, the rule maker, showed that there is a 33% fall in the admission of bankruptcy petitions filed by operational creditors in the December quarter

Insolvency and Bankruptcy Board of India headquarters, New Delhi, (Photo: Mint)Premium
Insolvency and Bankruptcy Board of India headquarters, New Delhi, (Photo: Mint)

New Delhi: Instances of vendors and suppliers arm twisting their clients to try and recover dues using the bankruptcy code as a tool is in sharp decline, showed official data.

Information available from the Insolvency and Bankruptcy Board of India (IBBI), the rule maker, showed that there is a 33% fall in the admission of bankruptcy petitions filed by operational creditors in the December quarter compared with the previous three months, while there is a matching increase in the admission of cases filed by financial creditors like banks.

The shift in the trend comes after both tribunals and the Supreme Court drove home the point in various cases that in spite of payment defaults, businesses could otherwise be solvent, a factor they said ought to be kept in mind while admitting cases.

Data shows there's been a sharp decline in the number of bankruptcy petitions initiated by operational creditors and admitted by National Company Law Tribunal (NCLT) – from 123 in the September quarter to 84 in the December quarter. At the same time, those initiated by financial creditors have risen from 112 to 148 in the same period.

Operational creditors – typically vendors and suppliers – accounted for 34% of the cases admitted in tribunals in the December quarter, down from nearly half of all cases admitted in the previous quarter. In the June quarter, operational creditors accounted for 43% of all cases admitted by NCLT.

In FY23, 42% all bankruptcy petitions admitted were initiated by vendors and suppliers. The figure was 53% in FY22. In the five years from FY18 to FY22, bankruptcy cases brought by operational creditors and admitted in tribunals were more than those initiated by financial creditors.

Experts agree courts need to take into account the solvency of a company while deciding whether to admit a case, rather going purely by a payment default.

“NCLAT Chennai bench had on 4 September ruled in a case that the spirit of IBC – the maximisation of asset and resolution of the company, and not recovery -- has to be kept in mind before admission of a bankruptcy petition. The proposed regime of mediation to achieve bankruptcy resolution will also help to address the practice of using IBC by operational creditors as a recovery tool," said Padmaja Kaul, partner at law firm IndusLaw.

The Supreme Court had in a dispute between Vidarbha Industries Power Ltd and Axis Bank Ltd, ruled in July 2022 that the existence of a debt and its default did not invariably need to be admitted for debt resolution. That helped to raise the bar for operational creditors to successfully take a business to tribunals for a payment default.

The government had in March 2020 raised the payment default threshold for initiating bankruptcy proceedings from 1 lakh to 1 crore in order to protect small businesses from being dragged to tribunals for payment defaults. This has helped in preventing operational creditors to initiate IBC action for small defaults, a person informed about the working of the Code said.

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Published: 21 Feb 2024, 08:49 PM IST
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