Small creditors lean on big players via IBC

Collateral benet: Small vendors using the Code was not the
aim of the IBC, says Ashish Chhawchharia of Grant Thornton

Collateral benet: Small vendors using the Code was not the aim of the IBC, says Ashish Chhawchharia of Grant Thornton  


New bankruptcy rules give vendors the ability to extract outstanding dues ahead of large lenders

In late June, one of India’s top wind power equipment makers, Inox Wind Ltd., was dragged into insolvency courts by a logistics handler over unpaid dues of $88,000. Two weeks on, the matter was settled, with dues paid off.

The case illustrates how small creditors and vendors, previously at the mercy of large debtors, are now using India’s new bankruptcy code as a pressure ploy to secure payment of dues that would earlier have been all but impossible to recover.

India overhauled bankruptcy laws last year with the main goal of helping banks tackle a $150-billion bad loan issue that is crimping growth in the economy.

Less than a year on, insolvency professionals say it is vendors and small suppliers, also referred to as operational creditors, who are using the new rules as leverage to recover dues much more effectively than banks owed far larger sums.

‘Not the objective’

“It is not necessarily a negative thing, but it was not the objective of the new code,” said Ashish Chhawchharia, a partner at Grant Thornton who works on insolvency cases.

The new rules give any creditor owed ₹1 lakh the right to drag a multi-billion dollar company to court.

They lay out a stringent timeline for resolution, or force debtors into automatic liquidation, giving outsize influence to vendors and suppliers who would normally rank well below secured financial creditors, such as lender banks, in any bankruptcy process.

But they have also stirred fears of a tsunami of cases jeopardising the plans of banks with billions of dollars at stake, and which are forced to join such proceedings.

“If an operational creditor initiates a process, that basically brings in unwilling financial creditors, even if they do not deem it the right time or course of action,” said leading insolvency lawyer Sumant Batra.

“NCLT has to hold an enquiry at the beginning to determine whether this has been filed only for recovery of debt, or whether this has been actually filed for a resolution or a liquidation process.”

Sweden’s Ericsson became the first foreign vendor to use the tool, filing a petition to drag Reliance Communications to insolvency courts over unpaid dues of $180 million.

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Printable version | Jan 20, 2020 10:38:51 PM |

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