Insolvency cases by operational creditors decline 41% in 9 months

New Delhi: Insolvency cases initiated by operational creditors, such as raw material suppliers and vendors, have crashed to their lowest this fiscal year, signalling their growing preference for faster out-of-court settlements with defaulters, officials and experts said.

The number of insolvency cases admitted by the National Company Law Tribunal (NCLT) on applications filed by operational creditors plunged 41% to 187 until December this fiscal from 316 a year before, showed the data compiled by the bankruptcy regulator.

In contrast, 358 admitted cases were filed by financial creditors during this period, down 7% from 384 a year earlier.


To be sure, operational creditors are still filing applications in large numbers with the NCLT under the Insolvency and Bankruptcy Code (IBC), but mainly to coax defaulters into settling dues, the people said. Once the dues are cleared, they are withdrawing the applications.

Given that dues in most of these cases are below ₹10 crore, defaulting promoters are clearing them fast to avoid formal insolvency proceedings and losing control of their firms, they said.

More than 28,000 insolvency applications, involving a combined default of over ₹10 lakh crore, were withdrawn before admission, Insolvency and Bankruptcy Board of India (IBBI) chairman Ravi Mital had said in December 2024. Most of these applications were filed by operational creditors.

Of course, where the default amount is large, the applications filed by operational creditors are more likely to result in the initiation of insolvency proceedings.

Manoj Kumar, head of insolvency resolution and M&A at consultancy firm Corporate Professionals Capital, said: "The drop in insolvency cases initiated by operational creditors in recent years is driven by mainly two factors-an increase in the minimum default threshold for invoking the IBC and the cost of pursuing a protracted and rigorous bankruptcy resolution process. So, they are often pursuing dues settlement".

Most of these operational creditors are small and medium businesses and they don't have the wherewithal or intent to either absorb the upfront cost of resolutions or wait for a long period to recover a part of their dues, Kumar added.

The minimum default threshold was raised to ₹1 crore from ₹1 lakh in March 2020, just after the pandemic broke out. This prevented many operational creditors seeking recovery in smaller default cases from pursuing the IBC proceedings.

Moreover, a growing number of operational creditors think their interests are shortchanged by financial creditors during the resolution process, said a Delhi-based insolvency expert. This is because the committee of creditors, which calls the shots in the resolution process of a stressed firm, comprises only financial creditors. "So, operational creditors' main interest is to get their money back, rather than facilitating the rescue of the stressed firms," he said.

In resolved cases, operational creditors have recovered 25.4% of their admitted claims, against 31.4% by financial creditors, showed the IBBI data. The data covered the period between late 2016, when the IBC was adopted, and December 2024.