Author: Shashvat Pauline, B.A. LL.B. (Third Year), ILS Law College, Pune
TO THE POINT
The Insolvency and Bankruptcy Code, 2016 was received as a transformative reform — a statutory rupture from the era of indeterminate liquidation queues. By subordinating managerial control to creditor authority upon default, the IBC restructured India’s insolvency ecosystem around the creditor-in-control principle. Yet the aggregate masks a structural fracture: the Code concentrates insolvency risk, with calculable precision, upon the category of creditors least equipped to absorb it.
Operational creditors — vendors, MSME suppliers, contractors, and employees — account for 45.75% of all CIRP initiations per IBBI data through March 2026. Yet they are excluded from the Committee of Creditors, barred from voting on their own claims, and consigned to the penultimate tier of the liquidation waterfall under Section 53. Resolution plans negotiated entirely by financial creditors have delivered average OC recoveries of 24.82% of admitted claims, against 30.61% for financial creditors. This article advances a fairness critique of that design: constitutional validity, settled by Swiss Ribbons (2019), is not the same as substantive equity.
USE OF LEGAL JARGON
The IBC’s differential treatment is anchored in the definitional divide between ‘financial debt’ under Section 5(8) — a disbursement against consideration for the time value of money — and ‘operational debt’ under Section 5(21), arising from the provision of goods, services, or employment. This determines the Committee of Creditors (CoC) composition under Section 21, constituted exclusively of financial creditors. Operational creditors receive only observer status under Section 24(3)(c) — a procedural concession that simulates inclusion while extinguishing deliberative substances.
The CoC exercises near-sovereign authority over the CorporateInsolvency Resolution Process (CIRP): it approves the resolution plan submitted by the resolution applicant under Section 30(4) by a 66% supermajority. Operational creditors — absent from every stage of negotiation — are nonetheless bound by it under Section 31. The ‘commercial wisdom of the CoC,’ cemented in Essar Steel (2020), renders this approval largely non-justiciable. Section 53’s waterfallmechanism insulates financial stakeholders by pushing operational riskto the periphery of asset distribution: secured FCs first, unsecured FCsat sub-clause (e), operational creditors at sub-clause (f). The Regulation38 minimum payment guarantee — the ‘liquidation value floor’ — ostensibly protects OCs, but as the data demonstrates, it is a floor built on sand.
THE PROOF
IBBI Quarterly Newsletter Vol. 38 (January–March 2026) provides granular empirical confirmation of the fairness deficit. Table 2 records that across all CIRPs yielding resolution plans as of March 31, 2026, operational creditors recovered 24.82% of admitted claims against financial creditors’ 30.61% — a 5.79
percentage point differential representing a structural redistribution of insolvency losses onto the OC class. Against liquidation value, FCs realised 177.96% while OCs realised 149.42%, confirming that OCs receive proportionally less even by the Code’s own internal benchmark.
Table 3 discloses a more troubling trajectory: OC-initiated CIRPs collapsed from 1,057 in 2019–20 to a mere 35 in January–March 2026. This is a deterrence signal. The cumulative burden of the Section 8 dispute barrier, mandatory NeSL pre-registration under the IBC Amendment Act, 2026, and near-certain minimal recovery has rendered CIRP initiation economically irrational for most operational creditors.
The BLRC’s foundational assumption at Para 5.3.1 of its 2015 Report— that FCs would pursue collective restructuring rather than self-interested NPA clearance — is unsupported by any enforcementmechanism in the Code. As Adv. Ankit Chandra has argued, banking institutions are structurally incentivised to accept any plan that clears their NPA ledger, regardless of consequences for OCs. Vidushi Puri sharpens this: when both FCs and OCs are unsecured, differential waterfall treatment is not differentiation — it is discrimination. No commercial logic places an unsecured bank above an unsecured MSME vendor in distributing already-realised assets. The MDI Gurgaon MSME study summarised in IBBI Vol. 38 confirms that MSME OCs — typically holding claims below 1 crore — find individual CIRPinitiation economically unviable.
ABSTRACT
The IBC bifurcates creditors into financial and operational classes — a division carrying defensible policy logic at theCoC level but generating deeply inequitable distributionaloutcomes in practice. This article employs a doctrinal and fairness-critique methodology to examine how CoC exclusion under Section 21, waterfall subordination under Section 53, and the hollow minimum payment guarantee under Regulation 38 systematically concentrate insolvencylosses upon operational creditors. Drawing on IBBI Newsletter Vol. 38 (January–March 2026), the BLRC Report (2015), and jurisprudence in Swiss Ribbons (2019), Essar Steel (2020), and Mobilox (2018), the article argues that constitutional validity does not foreclose a substantive fairness critique and that targeted legislative reform is overdue.
CASE LAWS
A. Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4SCC 17
The Supreme Court upheld the constitutional validity of the FC/OC distinction, applying the twin test of intelligible differentia and rational nexus. FCs — by virtue of institutional expertise and exposure to the time value of money — constitute a legally distinct class from OCs, whose relationship with the debtor is transactional. CoC exclusion was held neither arbitrary nor violative of Article 14. The Court validated the architecture, not its outcomes, accepting the BLRC’s behavioural assumption — that FCs will act in collective interest — without interrogating whether banking institutions’ incentives actually align with that assumption. A decade of IBBI data suggests they do not.
B. CoC of Essar Steel India Ltd. v. Satish Kumar Gupta(2020) 8 SCC 531
The approved resolution plan offered some operational creditors less than 2% of admitted claims while secured FCs recovered close to 60%. When the NCLAT intervened to equalise treatment, the Supreme Courtreversed that intervention — establishing that the CoC’s allocation ofresolution plan proceeds is an exercise of commercial wisdom, non-justiciable unless it violates Section 30(2)(b). The Court simultaneously inserted the Regulation 38 floor. Yet per IBBI Vol. 38, in the 42% ofCIRPs involving BIFR and defunct companies, average recovery was only 17.49% of admitted claims. The protection is real in form and illusory in substance.
C. Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2018) 1 SCC 353
Before reaching the CoC exclusion and waterfall problems, an OC must first clear the admission threshold. Mobilox held that a dispute ofdefence under Section 8 must be pre-existing, plausible, and not manufactured in response to the demand of notice — preventing corporate debtors from inventing disputes purely to evade proceedings. In practice, the plausibility standard is low enough that a sophisticated debtor can deploy routine commercial grievances retrospectively. The 2026 Amendment Act’s mandatory NeSL pre-filing requirement extends this vulnerability by creating an additional window for manufacturing dispute records before Section 9 is invoked.
CONCLUSION
The IBC has undeniably transformed India’s credit culture. Yet its aggregate achievements conceal a distributive failure. The operational creditor — the vendor who financed the factory’s inputs, the MSME supplier who extended credit in good faith — is the structural absorber of insolvency losses in a framework not designed to protect it. The BLRC’s taxonomy was not irrational; its error was treating an institutional description as a behavioural guarantee. Three targeted corrections would begin to close the fairness deficit. First, operational creditors with aggregate claims above a prescribed threshold should receive limited CoC voting rights — not parity, but a structured minority voice replacing the fiction of observer status. Second, theRegulation 38 floor must be decoupled from liquidation value and anchored to a fixed percentage of admitted claims — perhaps 15–20% — compelling resolution applicants to price OC protection into their bids. Third, MSME claim aggregation — as recommended by the MDI Gurgaon study in IBBI Vol. 38 — deserves urgent legislativeimplementation, restoring meaningful CIRP access for small creditors currently deterred by per-claim costs. Until these corrections are made, the IBC will continue to rescue corporations at the cost of the suppliers who kept them operational — a bargain constitutionally permissible, empirically documented, and fundamentally unjust.
Q1. Is the FC/OC distinction not commercially justified giventheir differing risk profiles?
At the CoC composition level, the distinction is defensible — FCs have institutional expertise OCs lack, and Swiss Ribbons correctly recognised this. The objection is to its extension to Section 53, where the question is distribution of already-realised assets. An unsecured FC and an unsecured OC occupy economically identical positions in liquidation — ranking one above the other reflects institutional preference, not commercial logic.
Q2. Does the Regulation 38 minimum payment guarantee notadequately protect OCs?
Only where liquidation value is meaningful. In the 42% of BIFR/defunct cases per IBBI Vol. 38, assets average approximately 5% of outstanding debt, making the floor functionally zero. Anchoring the guarantee to a percentage of admitted claims rather than liquidation value would make it genuinely operative.
Q3. Would granting CoC voting rights to OCs notcompromise resolution efficiency?
No serious proposal advocates for full FC/OC voting parity. Astructured minority voice on plan provisions directly affecting OCrecovery — not a plan veto — is sufficient. The NCLAT’s calibratedwaterfall concept demonstrates that OC protection can be achieved without conferring deliberative authority capable of impeding resolution timelines.
Q4. Does the IBC Amendment Act, 2026 not address OCvulnerability?
Not substantive. While introducing CIIRP and group insolvency mechanisms, the Amendment adds a pre-filing burden on OCs through mandatory NeSL registration, while simplifying FC admission throughIU records. CoC exclusion, waterfall subordination, and minimal judicial recourse remain entirely unaddressed by the 2026 amendments.
KEY REFERENCES
1. IBBI Quarterly Newsletter, January–March 2026, Vol. 38.
2. BLRC Report, Volume I: Rationale and Design (Ministry of Finance, November 2015).
3. Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17.
4. CoC of Essar Steel India Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531.
5. Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd., (2018) 1 SCC353.
6. Vidushi Puri, ‘Distinction in Treatment of FCs vs. OCs under IBC’, IBC Laws(2023).
7. Adv. Ankit Chandra, ‘The Alienation of Operational Creditors from CoC’, IBCLaws (2022).
8. Adv. V V S N Raju & Ms. Debleena Biswas, ‘Waterfall Mechanism: Time for aPriority Reset?’, IBC Laws (2025).
9. MDI Gurgaon, ‘MSMEs in the IBC’ (IBBI Research Study, 2025–26).
10. IBC (Amendment) Act, 2026, assented to April 6, 2026.
11. IBBI (CIRP) Regulations, 2016, Regulation 38 (as amended 2019).
