Why last-in-queue lenders file most insolvency pleas


India’s new bankruptcy law is getting maximum traction from an unusual set of lenders, those with the least to gain from pushing companies into the insolvency process.

Operational or unsecured creditors, who have dues that are not backed by any collateral, would be last in queue to be repaid once an insolvency plea succeeds in the National Company Law Tribunal (NCLT). Yet, such parties have triggered 44 per cent of corporate insolvencies this year, according to the latest data from the Insolvency and Bankruptcy Board of India (IBBI). Financial or secured creditors were responsible for 32 per cent of successful petitions. The law was enacted to encourage asset sales as the bad-debt ratio of banks climbed to be among the worst in the world. It is quickly becoming a bargaining tool for unsecured, smaller lenders dealing with larger corporates that don’t pay despite being solvent, said Khushboo Shah, a Mumbai-based lawyer with MDP & Partners. The bankruptcy law has given them “a ray of hope”, she said.

Operational creditors include vendors or other contractors that have unpaid dues for goods or services rendered. They stand last in the repayment queue, behind financial and other secured lenders, in the case of an insolvency. They are not even allowed a seat on the committee of lenders that decides on the resolution plan for a sick company.

Such lawsuits have the potential to spook markets. Anil Ambani’s Reliance Communications  fell 7 per cent after a Mumbai tribunal heard an insolvency plea by Fortuna Public Relations. Jain Irrigation Systems’ dollar bonds due 2022 posted a record drop on December 5 after it was sued by German Express Shipping for unpaid dues, forcing the firm to say that it expected to settle the claim soon. Such lenders usually settle, waiving the interest, if they are paid as much as 80 per cent of the principal owed, Shah said. “Certain operational creditors are using the bankruptcy law as a strong arm tactic but it’s all a result of being neglected far too long by bigger corporate debtors.”