Indian bankruptcy law is gradually changing its character. Insolvency results show that operative creditors, such as sellers, have been most active in taking defaulting companies before bankruptcy courts, as well as in out-of-court settlements and withdrawals. But this trend is changing in a fundamental way.
Mint looks at what the official figures say about the behavior of creditors.
Who resorts to the insolvency code the most?
In each of the five years up to FY22, operative creditors were ahead of financial creditors such as banks in the initiation of insolvency proceedings, according to the number of cases received at the National Company Law Tribunal (NCLT), according to data available from the sector’s rule-maker, the Insolvency and Bankruptcy Board of India (IBBI).
Operational creditors have been proactive in using the code to put pressure on businesses to repay. The Insolvency and Bankruptcy Code (IBC) has come to be used as a recovery tool for suppliers facing delays in payment for their goods and services.
The trend began to change after FY22, when bankruptcy cases initiated by financial creditors exceeded those initiated by operational creditors. In FY21, operational creditors accounted for 59% of the 536 insolvency cases taken up by the NCLT. This share declined to around 43% in FY23, 40% in FY24 and around 31% in FY25.
In the first two quarters of this financial year, operational creditors accounted for 38% of all admitted cases. That proportion fell to a third of all cases in the September quarter, suggesting they are now retreating in insolvency proceedings.
Insolvency proceedings can be initiated by the companies themselves, but such cases are very rare. So far under the IBC, only 6% of the 8,654 cases received have been initiated by the companies themselves. Reserve Bank of India has referred five cases to NCLT to resolve the debt.
Were operative creditors able to settle their payment disputes quickly?
The data show that two-thirds of the 1,342 bankruptcy proceedings closed so far, including settlements, were initiated by operative creditors. They also accounted for two-thirds of all cases (1,223 cases) withdrawn from the tribunal.
In the cases that ended with the approval of insolvency plans, operating creditors accounted for roughly a quarter of the claims, financial creditors a third of the claims.
What does displacement mean?
The decline in insolvency proceedings initiated by trade creditors suggests that the IBC is maturing as a business rescue tool led by financial creditors.
What brought about the shift?
One of the factors that caused the change was the government’s decision in March 2020 to raise the insolvency threshold for starting an IBC from ₹1 lakh up to ₹1 crore. This measure discouraged creditors from invoking the IBC for late payments on small payments.
The changing trend in filings is quite natural and reflects the learning curve of both banks and the business community, said Mukesh Chand, senior counsel at the Economic Laws Practice. When the IBC was implemented in 2016, banks were still comfortable with the frameworks under the Debt Recovery Tribunal and the Securitization and Reconstruction of Financial Assets and Securities Recovery Act. They have limited experience with resolution plans, creditor committees or value maximization processes, he said.
“On the other hand, operative creditors (OS) were quick to seize the opportunity. Already in the earlier regime of the Companies Act, they used winding-up proposals as a coercive tool and adapted this strategy to insolvency proposals as well,” explained Chand. “The threat of acceptance under the IBC has become an extremely effective pressure mechanism to force many borrowers to settle well in advance of acceptance. IBBI data clearly reflects this, with a large proportion of OC-initiated cases being withdrawn or settled before acceptance.”
On the other hand, banks were encouraged first by the government and then by the RBI guidelines to adopt the IBC framework in a meaningful way.
“As financial creditors realized the effectiveness of the time-bound resolution, avoidance actions and the priority accorded to them in the waterfall (the hierarchy for distribution of liquidation proceeds), they increasingly moved their distressed accounts up ₹1 crore to IBC, overtaking OC in initiation cases from FY22 onwards,” added Chand.
