Why Last-in-Queue Lenders File Most Insolvency Lawsuits in India

(Bloomberg) -- 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, India’s bankruptcy courts. Yet, such parties have triggered 44 percent of corporate insolvencies this year, according to the latest data from the Insolvency and Bankruptcy Board of India. Financial or secured creditors were responsible for 32 percent of successful petitions.

The law was enacted last year to encourage asset sales as the bad-debt ratio of Indian 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.

Who Pulled The Plug?

Source: {http://ibbi.gov.in/IBNNOV2017_13.pdf}

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 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. Billionaire Anil Ambani’s Reliance Communications Ltd. fell 7 percent after a Mumbai tribunal heard an insolvency plea by Fortuna Public Relations Pvt., the indebted wireless carrier’s former PR agency.

Jain Irrigation Systems Ltd.’s dollar bonds due 2022 posted a record drop on Dec. 5 after it was sued by German Express Shipping for unpaid dues, forcing the company to say in a filing that it expects to settle the claim soon.

Such lenders usually settle, waiving off the interest, if they are paid as much as 80 percent of the principal sum 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,” she said.

To contact the reporters on this story: Bhuma Shrivastava in Mumbai at bshrivastav1@bloomberg.net, Upmanyu Trivedi in New Delhi at utrivedi2@bloomberg.net.

To contact the editors responsible for this story: Young-Sam Cho at ycho2@bloomberg.net, Candice Zachariahs, Unni Krishnan

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