With the latest amendments to the Code (IBC,2016) effective from 16.08.2019, the funds under resolution plan and in liquidation process are to be distributed according to the following priority, as per section 53(1) of the code.
**Priority of Payment in IBC in brackets
Notably, distinction under section 53 is a two-fold distinction – (i) secured / unsecured, and (ii) operational / financial. As regards secured creditors, it does not matter whether the creditor is financial or operational, since section 53(1)(b) uses the expression “secured,” and there is no indication as to the nature of debt (financial / operational) owed to such secured creditor. However, when it comes to unsecured creditors, unsecured financial creditors appear in the 4th rank; but unsecured operational creditors come in the 6th rank.
Contractually, unsecured financial creditors and unsecured operational creditors stand in the same ranking. The operational creditors have been given priority two ranks below the unsecured financial creditors.
An economy runs not merely on the financial system, but on the system of supply of goods and services. Goods and services are supplied for credit, which is why operational creditors arise. Supply of goods and services on credit becomes a part of the working capital for the entity, which exactly serves the same purpose as served by financial lenders.
Supply of goods and services on credit is a crucial part of the economy. The base of the economy of any country is its real sector; financial sector is important, but not at the cost of the real sector. Suppliers of goods and services, including MSME's, are a part of the real sector.
How will MSME’s continue to supply goods and services on credit to their customers, if they were to be told that if the customer goes into a default, all the money will go first to bankers, and money will be paid to the suppliers only if there is a surplus left ?
The UNCITRAL legislative guide on insolvency law, provides”-
- that similarly ranked creditors are treated equally.
- that “related persons claim to be subordinated to the claims of the ordinary unsecured claims.
Related parties claims should rank inferior to the claims of other unsecured creditors. Under I & B Code, 2016, unsecured financial creditors, even though that creditors happens to be a related party of the corporate debtor, are rank higher to the claims of operational creditors in water fall mechanism, which appears to be discriminatory.
MSME’s contribution towards the industrial production is about 45% & in the services sector it is about.30.5%, MSME’s are also the biggest employment provider in the country. Subordination of the debt for supply of goods & services to the dues of Related parties, as provided in IBC, is neither logical nor justified. Dues of MSME’s for supply of goods & services must be given priority equal to unsecured financial creditors & unsecured dues of related parties be subordinated to the dues of all outside parties.
Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision, commercial or otherwise. One must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.
Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision, commercial or otherwise. One must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.
I entirely agree with the argument advanced in favour of MSME OR SUPPLIER OF GOODS. While calculating the current assets are required to be reduced to the extent of the unpaid creditors of goods to avoid double financing. Thus in realty they are secured without execution of charge document. In other words now if the proceed of entire inventory if given on priority to banks being secured, to my mind is unreasonable and a sort of fraud on them. Further, these suppliers might have also availed the bank credit and therefore, those units will also go for IBC RESOLUTION.
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