Calibrated Waterfall Mechanism instead of Straight Waterfall Mechanism approach, under Section 53 of IBC
Payment to Operational Creditors under Resolution Plan in case of Liquidation Value NIL

In an important judgment of NCLAT, reported in (2024) ibclaw.in 819 NCLAT, the Hon’ble NCLAT, the bench comprising of Justice Rakesh Kumar Jain Member (Judicial) and Mr. Naresh Salecha Member (Technical), notes that the Operational Creditors have little say in the resolution of the Corporate Debtor since they are not part of the CoC. At the same time, they are prone to maximum haircut and which may adversely affected their own survival. Legally speaking, in terms of waterfall management under Section 53 of the Code, the Operational Creditors are entitled to claim payments as per liquidation value of the Corporate Debtor or actual proposed payment whichever is more. In most of the cases, for Operational Creditors, liquidation value is nil as CIRP cost, dues towards Secured Creditors, employees, workman, other Financial Creditor takes precedent over Operational Creditor.

The Hon’ble Bench suggests that the Operational Creditor will have a chance only, if any, residual amount remains available as per liquidation value of the Corporate Debtor. However, if the waterfall mechanism as provided under Section 53 of the Code is tweaked, in the sense that instead of straight waterfall mechanism approach, the calibrated waterfall mechanism could be considered, then these may be some chances for the Operational Creditors to get some payments. The Hon’ble Appellate Tribunal held that their tweaking can be done in several ways. One of the way could be, distribution of corpus available in Resolution Plan to Operational Creditors in some pre determined percentage of the payments propose to be paid to Financial Creditors in the Resolution Plan. This will ensure that Operational Creditors will get some minimum amount due to insolvency of Corporate Debtor in relation to amount payable to the Financial Creditor in the Resolution Plan. This amount may be much lower in comparison to amount being paid to the Financial Creditors due to obvious and valid reasons. Even this small amount will help such Operational Creditors, specially the smaller Operational Creditors, to tide over the financial crises which happens due to CIRP of the Corporate Debtor.

Such approach would require legal provision by way of suitable amendments in the Regulations and Code. The Hon’ble NCLAT requests the IBBI to look into this aspect if found feasible after due examination.