A Doctrinal Analysis of Implications of Differential Treatment under IBC,2016, on Operational Creditors, Impact on MSMEs and Addressing the Question of Fairness

The Insolvency and Bankruptcy Code, 2016 (IBC) has bifurcated the creditors to whom debts are due into two categories: Financial Creditors (FCs) and Operational Creditors (OCs). During the Corporate Insolvency Resolution Process (CIRP) and recovery of dues during liquidation, FCs have been given preferential treatment, while OCs, which consist of suppliers, service providers, employees and government bodies, face a lengthy, time-consuming insolvency initiation process, are kept out of participation in CIRP and have been included in the category of unsecured debtors who are in the lowest rank for repayment of dues by distribution of assets under Section 53. The Courts, through various judgements, have justified such differential treatment of OCs, citing the commercial wisdom of the FCs and fairness. These circumstances have negatively affected MSMEs and small businesses engaged in the supply of goods and services to corporate debtors (CDs) on credit. Through this research paper, we shall analyse the legal framework governing OCs under IBC, analyse landmark judgments propounded by the judicial authorities, scrutinise whether OCs are dealt with procedural and substantive fairness, explore how such substituted status affects MSMEs and finally, undertake a comparative analysis with the U.S. Bankruptcy Code to identify best practices. The paper concludes by recommending reforms to strengthen OC rights, restore balance between classes of creditors and ease the position of MSMEs.