The silent battle between Operational Creditors and Financial Creditors under the IBC — and why one group bears the cost without getting a vote.
Let’s start with a simple question: if a company goes bust and a rescue plan is put together, who gets to decide what happens to your money?
Under India’s Insolvency and Bankruptcy Code, 2016 the IBC the answer is pretty clear: the banks and financial institutions do. Not the suppliers who delivered goods on credit. Not the employees owed unpaid wages. Not the government agencies with statutory dues. Just the financial creditors, sitting on a Committee of Creditors (CoC), voting on a resolution plan that will bind everyone else too.
That’s the arrangement baked into the IBC. And it raises a question that doesn’t get enough airtime: is this a cross-class cramdown mechanism one where an entire class of creditors is forced to accept a plan they had no hand in shaping?
The short answer is yes. But the longer answer is where it gets interesting.
First, What Even Is a Cramdown?
In the world of insolvency law, a “cramdown” is what happens when a court approves a restructuring plan over the objections of certain creditors. Instead of needing unanimous buy-in which would give every creditor veto power and make rescue plans almost impossible the law allows a majority to push through a plan, with the minority being “crammed down.”
This makes practical sense. Otherwise, one stubborn lender could hold an entire viable business hostage just to extract a better deal for themselves.
There are two flavours of this:
Intra-class cramdown: A minority within the same creditor class is outvoted and bound by the majority’s decision.
Cross-class cramdown: An entire class of creditors not just a minority is subjected to a plan decided by a completely different class. This is far more controversial, because it’s not just about outvoting some holdouts; it’s about one group making decisions that bind another group entirely.
Countries like the United States (through Chapter 11 of its Bankruptcy Code), Singapore, and more recently the United Kingdom have formal, explicit cross-class cramdown provisions. They set out clear rules: you can cram down a dissenting class, but only if they’re not left worse off than they would be in liquidation, and only with court supervision.
India has never used that language. The IBC doesn’t have a provision titled “cross-class cramdown.” But here’s the thing it doesn’t need to. The mechanism already exists. It’s just hidden in plain sight within the structure of the statute itself.
The IBC’s Two-Tier Creditor System
To understand how this works, you need to understand how the IBC carves up the creditor world.
Financial Creditors- The Decision-Makers
These are entities to whom money is owed on account of a financial transaction think loans, bonds, debentures, and similar instruments. In practice, this means banks and regulated financial institutions. They get a seat on the CoC. They vote. They decide.
Voting weight in the CoC is proportional to the value of each financial creditor’s admitted claim. A resolution plan needs at least 66% of the total voting share to pass.
Operational Creditors -The Bystanders
These are the suppliers of goods and services, the employees, the statutory authorities, and the government agencies owed dues. Their claims arise from the day-to-day commercial operations of the business raw materials supplied, services rendered, wages earned.
Here’s the critical point: operational creditors are not members of the CoC. The only exception is Regulation 16 of the CIRP Regulations, which applies in two narrow situations where the corporate debtor has no financial debt at all, or where all financial creditors are related parties of the debtor and therefore disqualified under Section 21(2) of the Code. In those cases, operational creditors constitute the CoC and exercise full voting rights. Outside these exceptions, however, they have no vote on the resolution plan. They can attend CoC meetings and make representations, but when the voting happens, they sit out.
And yet once the CoC approves a plan and the National Company Law Tribunal (NCLT) sanctions it the plan is binding on everyone. Including the operational creditors who never got a say.
One class of creditors makes the decision. Another class lives with the consequences. That, structurally, is cross-class cramdown.
The Provision That Does All the Heavy Lifting: Section 30(2)(b)
If operational creditors have no vote, what stops financial creditors from simply writing them off entirely in a resolution plan?
The answer is Section 30(2)(b) of the IBC. This is the single most important statutory protection for operational creditors in the resolution process, and it’s worth understanding exactly what it does and what it doesn’t.
What the Section Says
Section 30(2)(b) requires that every resolution plan must provide for payment to operational creditors of an amount that is not less than what they would have received had the company gone into liquidation on the date the insolvency process began.
This is called the liquidation value floor. Think of it as a minimum guarantee a floor below which operational creditors’ recoveries cannot be pushed, no matter what the financial creditors decide.
Why It Matters
The liquidation value floor is the substitute for a vote. Because operational creditors don’t get to participate in shaping the resolution plan, the law tries to protect them by ensuring they at least receive what they’d get if the company were simply broken up and sold off. It’s a form of “no worse off” protection you may not get a say, but you won’t be left in a worse position than if there had been no rescue at all.
This mirrors, at least in concept, what explicit cross-class cramdown frameworks in the US and UK require. The difference is that those systems have a more elaborate process: multi-class voting, court approval of the cramdown itself, and stricter oversight of the “no worse off” test.
The Catch – When the Floor Is Nearly Zero
Here’s where the protection shows its limits.
The liquidation value is calculated based on what would remain for operational creditors after all higher-priority claims are satisfied. Under the IBC’s distribution waterfall, secured financial creditors are paid first from their security. What’s left over is what filters down to operational creditors.
In many insolvency cases, by the time you’ve paid off secured creditors, there’s very little left. The “liquidation value” available to operational creditors can be close to zero. And a guarantee that you’ll receive “not less than zero” isn’t much of a guarantee at all.
So while Section 30(2)(b) exists as a statutory protection, its practical impact depends entirely on the financial health of the debtor’s estate — something operational creditors have no control over and very limited information about during the resolution process.
KEY PROVISION Section 30(2)(b) IBC — A resolution plan must provide for payment to operational creditors of not less than the amount receivable by them in the event of a liquidation of the corporate debtor.
What the Courts Have Said
Three Supreme Court decisions directly shaped the legal position on cramdown and the treatment of operational creditors under the IBC. Each resolved a specific question and together they define exactly how much protection operational creditors can realistically expect.
Swiss Ribbons: Yes, It’s a Cramdown and That’s Okay
In Swiss Ribbons Pvt Ltd v. Union of India, the Supreme Court directly confronted the challenge that the IBC’s treatment of operational creditors is discriminatory and unconstitutional. The Court upheld the differential treatment, holding that financial creditors and operational creditors are genuinely different in nature different relationships with the debtor, different levels of sophistication, different stakes in the outcome.
But here’s the remarkable thing: the Court acknowledged, explicitly, that operational creditors are crammed down under the IBC. It said this is constitutionally acceptable, provided the statutory minimum payment protections under Section 30(2)(b) are respected. That’s effectively the Supreme Court putting its seal of approval on the cross-class cramdown character of the IBC.
Essar Steel: Equal Treatment Doesn’t Mean Equal Payment
The Essar Steel case produced one of the most consequential rulings in IBC jurisprudence. The appellate tribunal had stepped in and equalised recovery percentages across financial and operational creditors, reasoning that unequal treatment was discriminatory.
The Supreme Court reversed this completely. Equitable treatment, the Court held, does not mean equal treatment. Financial creditors are entitled to receive more than operational creditors in a resolution plan, because the CoC which consists of financial creditors has the commercial wisdom to make that call, and courts should not second-guess distribution decisions as long as Section 30(2)(b) is satisfied.
The implications are stark: operational creditors have no legal claim to a share of the surplus generated by the resolution. They receive their statutory floor and nothing more, unless the CoC in its generosity decides otherwise.
Pratap Technocrats: No Broad Equity Jurisdiction for Courts
In Pratap Technocrats, the Supreme Court went further. It surveyed the “unfair prejudice” standards available to creditors in the UK and the “fair and equitable” standards in the US, and then firmly held that Indian courts have no such broad equity jurisdiction in insolvency matters.
Fairness under the IBC is defined by the statute specifically by Section 30(2). Courts cannot invent additional fairness requirements or impose their own views on what a just outcome looks like. If Section 30(2) is complied with, the plan passes judicial scrutiny, full stop.
This ruling effectively closes the door on operational creditors seeking any remedy beyond the Section 30(2)(b) floor through the courts.
The Problem: A Floor That Often Doesn’t Hold Much Up
So let’s put this all together from the perspective of an operational creditor.
You supplied goods to a company. The company went into insolvency. You have no seat at the table. A resolution plan is negotiated entirely between the company’s bankers. The plan is approved by those same bankers. The NCLT sanctions it. And you are now bound by it receiving whatever the plan allocates to you, as long as it’s not less than your liquidation value share.
That liquidation value share might be very small. You have limited information about how it was calculated. You can challenge compliance with Section 30(2)(b) before the NCLT, but courts won’t look beyond that. You have no right to a share of the going-concern surplus. You have no vote. You have no realistic appeal.
This is the lived reality of cross-class cramdown under the IBC, even if the statute doesn’t call it that.
Government authorities statutory creditors owed tax dues, provident fund contributions, and regulatory levies have been particularly vocal about this. They frequently receive negligible recoveries and have tried various legal routes: seeking reclassification as secured creditors, challenging the CoC’s exercise of commercial wisdom, questioning the constitutionality of their exclusion. Courts have rejected these arguments consistently.
On the other side of the equation, even financial creditors aren’t entirely comfortable. Secured lenders who voted against a resolution plan but were outvoted face their own cramdown and a series of Supreme Court decisions have left significant uncertainty about whether their security interests will be respected in the distribution of resolution proceeds. The question of whether a secured creditor can insist on security-interest-based payment or must share recovery on a pro-rata basis with other financial creditors remains, at the time of writing, pending before a larger bench of the Supreme Court.
So Does India Have a Cross-Class Cramdown? The Verdict
Yes, but it’s a cramdown without the procedural architecture that usually accompanies it.
In the US, UK, and Singapore, cross-class cramdown is an explicit tool available in specific circumstances, activated by dissent in a multi-class vote, and subject to dedicated judicial oversight. The court examines whether the cramdown is fair. The dissenting class gets to present its case. There are structured tests “fair and equitable,” “no worse off,” “absolute priority” that provide guardrails.
In India, the cramdown is the default. Operational creditors don’t vote, so there’s no dissent to trigger any special review. The only protection is Section 30(2)(b), and the only enforcement is at the plan-approval stage before the NCLT. There’s no bespoke judicial process for examining whether the cross-class imposition is justified.
India’s cramdown is structural, not procedural. It doesn’t need to be triggered it’s always already happening.
That’s a meaningful distinction. Explicit cramdown regimes are designed with transparency and accountability in mind: they acknowledge that overriding a class of creditors is a serious step, and they build in safeguards accordingly. India’s implicit approach achieves the same outcome binding a non-voting class to a majority-approved plan without the same level of procedural rigour.
Conclusion
The IBC’s architects made a deliberate and understandable choice: concentrate decision-making power in the hands of financial creditors, who have the greatest stake, the most sophistication, and the strongest incentive to maximise going-concern value. It’s a rational design.
But rationality and fairness aren’t the same thing. When one class of creditors routinely absorbs restructuring losses without any meaningful participation in the decisions that produce those losses, the system needs to be honest about what it’s doing — and purposeful about the protections it provides in return.
Cross-class cramdown is a powerful tool. India uses it. It’s time to use it more carefully.
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