Resolution in Name, Recovery in Fact: The Operational Creditor and Section 9
Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) allows an operational creditor to initiate the corporate insolvency resolution process when an eligible operational debt remains unpaid and the statutory requirements are satisfied. However, initiating insolvency proceedings does not guarantee that the creditor will recover the outstanding amount.
The operational creditor's dilemma
Operational creditors, including suppliers of goods and services, may use insolvency proceedings to address persistent payment defaults. Yet, once a corporate insolvency resolution process begins, their influence over the outcome is limited. Under the IBC framework, operational creditors generally do not have voting rights in the Committee of Creditors, and their recovery depends on the applicable statutory framework and the approved resolution plan.
Resolution versus recovery
The IBC primarily aims to resolve insolvency and preserve viable businesses rather than function as an ordinary debt-recovery mechanism. The distinction creates a practical challenge for operational creditors who seek payment but may receive only a limited distribution through the insolvency process.
The Supreme Court's decision in Mobilox Innovations Private Limited v. Kirusa Software Private Limited established the importance of examining whether a genuine pre-existing dispute exists when considering a Section 9 application. Insolvency proceedings cannot be used as a substitute for ordinary proceedings to resolve a genuinely disputed payment claim.
Impact of the 2026 amendments
The article examines changes introduced by the Insolvency and Bankruptcy Code (Amendment) Act, 2026, including measures affecting the consideration of resolution plans, distribution-related processes and procedural transparency. It argues that these changes do not fully address the structural disadvantages faced by operational creditors, particularly concerning their participation and potential recovery.
Proposed reforms
The author advocates a more balanced approach that protects debtors from the misuse of insolvency proceedings while providing legitimate creditors with an effective route to payment. Suggested measures include mandatory pre-filing mediation, appropriate safeguards against strategic non-payment, stronger protection for micro, small and medium enterprise suppliers, and a more meaningful opportunity for operational creditors to raise objections concerning distributions.
Conclusion
The central argument is that insolvency law should distinguish between genuine corporate financial distress and isolated payment disputes involving solvent companies. A structured settlement mechanism before admission of a Section 9 application could help creditors recover legitimate dues while reducing unnecessary insolvency proceedings. The article calls for reforms that better balance insolvency resolution with fair treatment of operational creditors.
Source: Bar & Bench, opinion article by VP Singh, advocate practising before the Supreme Court and former NCLT/NCLAT member. The views expressed are the author's own.