Small creditors use India's new bankruptcy rules to put the squeeze on big players

In late June, one of India's top wind power equipment makers, Inox Wind Ltd, was dragged into insolvency courts by a logistics handler over unpaid dues of $88,000. Two weeks on, the matter was settled, with dues paid off. The case illustrates how small creditors and vendors, previously at the mercy of large debtors, are now using India's new bankruptcy code as a pressure ploy to secure payment of dues that would earlier have been all but impossible to recover.
India overhauled bankruptcy laws last year with the main goal of helping banks tackle a $150-billion bad loan issue that is crimping growth in the economy. Less than a year on, insolvency professionals say it is vendors and small suppliers, also referred to as operational creditors, who are using the new rules as leverage to recover dues much more effectively than banks owed far larger sums.
"It is not necessarily a negative thing, but it was not the objective of the new code," said Ashish Chhawchharia, a partner at Grant Thornton who works on insolvency cases. The new rules give any creditor owed 100,000 rupees ($1,560) the right to drag a multi-billion dollar company to court. They lay out a stringent timeline for resolution, or force debtors into automatic liquidation, giving outsize influence to vendors and suppliers who would normally rank well below secured financial creditors, such as lender banks, in any bankruptcy process.
But they have also stirred fears of a tsunami of cases jeopardising the plans of banks with billions of dollars at stake, and which are forced to join such proceedings. "If an operational creditor initiates a process, that basically brings in unwilling financial creditors, even if they do not deem it the right time or course of action," said leading insolvency lawyer Sumant Batra.