Answer By law4u team
The treatment of creditors is a cornerstone of insolvency laws worldwide, balancing their rights while aiming for efficient resolution or liquidation. India’s IBC brought transformative changes in creditor treatment by prioritizing financial creditors and empowering them via the Committee of Creditors (CoC). However, differences remain compared to other jurisdictions, particularly in creditor classification, rights, and participation.
Differences in Treatment of Creditors Under IBC Compared to Other Jurisdictions
Creditor Classification and Priority
IBC: Prioritizes financial creditors (banks, financial institutions) over operational creditors (suppliers, service providers). Financial creditors form the Committee of Creditors (CoC) and have primary control over resolution decisions. Operational creditors have limited voting rights but can initiate insolvency under certain conditions.
Other Jurisdictions: Many countries, like the US (Chapter 11) and UK, treat operational creditors and employees with greater protection, sometimes giving them higher priority or separate classes in restructuring. Some jurisdictions also prioritize secured creditors strongly, often ahead of unsecured creditors.
Committee of Creditors (CoC) vs. Creditor Committees Elsewhere
IBC: The CoC consists mainly of financial creditors and drives resolution plans and decisions, including approval of resolution proposals. Operational creditors are usually excluded from the CoC voting.
Other Jurisdictions: In the US and UK, creditor committees may include a broader mix of creditors, including unsecured and operational creditors, reflecting a more inclusive approach to stakeholder participation.
Voting Thresholds and Decision-Making
IBC: Requires 66% (later 75% in some cases) approval from the CoC for resolution plans, concentrating power with majority financial creditors.
Other Jurisdictions: Voting thresholds and creditor approval requirements vary, with some offering more protections to minority creditors or multiple classes voting separately.
Treatment of Secured Creditors
IBC: Secured creditors can enforce their security outside the insolvency process but often participate in the CoC if their claims exceed certain thresholds. The code also allows resolution plans to modify secured creditor rights with their consent.
Other Jurisdictions: In countries like the US, secured creditors have significant protections and rights, including control over collateral and ability to influence the plan. In the UK, secured creditors can appoint administrators or push for liquidation if interests are not met.
Treatment of Unsecured Creditors
IBC: Unsecured creditors often have limited influence during the CIRP and may recover less in liquidation, depending on asset value.
Other Jurisdictions: Some countries provide greater protections or participation rights to unsecured creditors, including the formation of unsecured creditor committees.
Employee and Government Creditor Rights
IBC: Employees and government dues are considered operational creditors and rank lower than financial creditors but enjoy certain protections like priority in payment of wages.
Other Jurisdictions: Many countries give employees higher priority in insolvency and specific protections for unpaid wages and benefits.
Cross-Border Creditor Treatment
IBC: Limited cross-border insolvency provisions may affect foreign creditors’ rights and participation.
Other Jurisdictions: Countries with UNCITRAL Model Law adoption have clearer rules for foreign creditor recognition and participation.
Example:
Consider a manufacturing company undergoing insolvency under IBC:
A bank (financial creditor) with a large secured loan dominates the CoC and steers the resolution plan.
Suppliers (operational creditors) have limited voting rights and must accept the CoC’s decisions.
Employees’ unpaid wages are prioritized within operational creditors but do not influence resolution decisions.
If the company has foreign creditors, their participation might be limited due to the absence of clear cross-border insolvency laws.
In contrast, under US Chapter 11, unsecured creditors and employees may form separate committees, participate actively, and have a say in the reorganization plan.
