(MENAFN- Live Mint)

India's bankruptcy code is gradually changing its character. The outcomes of insolvency proceedings show that operational creditors such as vendors had been most active in dragging defaulting companies to bankruptcy tribunals and also in settling out of court and withdrawing petitions. But that trend is changing in a significant way.

Mint looks at what the official data says about creditor behaviour.

Who resorts to the bankruptcy code the most?

In each of the five years up to FY22, operational creditors were ahead of financial creditors such as banks in initiating bankruptcy proceedings, going by the number of cases admitted in the National Company Law Tribunal (NCLT), as per data available from the sector's rule maker, the Insolvency and Bankruptcy Board of India (IBBI).

Operational creditors were proactive in invoking the code to put pressure on businesses for repayment. The Insolvency and Bankruptcy Code (IBC) came to be used as a recovery tool by suppliers facing delays in getting paid for their goods and services.

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The trend started to change after FY22, with financial creditor-triggered bankruptcy cases exceeding those initiated by operational creditors. In FY21, operational creditors accounted for 59% of the 536 insolvency cases admitted in the NCLT. This share declined to about 43% in FY23, 40% in FY24 and about 31% in FY25.

In the first two quarters this financial year, operational creditors accounted for 38% of all cases admitted. This share dropped to a third of all the cases in the September quarter, suggesting they are now taking a back seat in triggering insolvency proceedings.

Businesses themselves can initiate insolvency proceedings, but such cases are very few. So far under IBC, only 6% of the 8,654 admitted cases were initiated by the companies themselves. The Reserve Bank of India referred five cases to the NCLT for debt resolution.

Were operational creditors able to settle their payment disputes quickly?

The data shows that two-thirds of the 1,342 bankruptcy cases closed so far, including settlements, had been initiated by operational creditors. They also accounted for two-thirds of all cases (1,223 cases) withdrawn from tribunals.

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In cases that ended in approval of insolvency resolution plans, operational creditors got about a fourth of their claims, while financial creditors got a third of their claims.

What does the shift mean?

The decline in insolvency proceedings initiated by trade creditors suggests that the IBC is maturing as a financial creditor-led corporate rescue instrument.

What brought about the shift?

One factor that brought about the change was the government's decision in March 2020 to raise the payment default threshold for triggering IBC action from ₹1 lakh to ₹1 crore. That measure discouraged creditors from invoking IBC for delays in 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 Economic Laws Practice. When the IBC was implemented in 2016, banks were still comfortable with frameworks under the Debt Recovery Tribunal and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act. They had limited experience in resolution plans, creditor committees, or value-maximisation processes, he said.

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“In contrast, operational creditors (OCs) were quick to seize the opportunity. They had already been using winding-up petitions as a pressure tool under the earlier regime of the Companies Act and they adapted that strategy to insolvency filings too," explained Chand.“The threat of admission under IBC became an extremely effective pressure mechanism, prompting many debtors to settle well before admission. The data from the IBBI clearly reflects this, with a large share of OC-initiated cases being withdrawn or settled prior to admission."

On the other hand, banks were encouraged first by the government and then by the RBI's directives to meaningfully adopt the IBC framework.

“Once financial creditors realised the effectiveness of time-bound resolution, avoidance actions, and the priority accorded to them in the waterfall (the hierarchy for distribution of liquidation proceeds), they increasingly shifted their stressed accounts above ₹1 crore into IBC, overtaking OCs in initiating cases from FY22 onwards," added Chand.

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