The Silent Stakeholders of Insolvency

Operational creditors as suppliers, vendors, contractors, service providers and MSMEs form the backbone of a company's day-to-day operations. Yet, once insolvency proceedings commence, they stand below financial creditors in the repayment waterfall and often recover only a fraction of their dues, if anything at all.

In Tata Steel Ltd. v. Varsha & Anr. (2026), while reaffirming the clean slate principle, the Supreme Court acknowledged this imbalance, observing that the present framework does not adequately protect small operational creditors, many of whom cannot absorb even modest financial losses.

The judgment also reflects a practical reality familiar to insolvency practitioners. For many operational creditors, the IBC has become more of a negotiating tool than a genuine recovery mechanism. CIRP applications are often filed to encourage settlement before admission. Ironically, if the CIRP is admitted, the very creditor who initiated it may find itself worse off relegated to the bottom of the waterfall and left with little or no recovery.

This exposes a disconnect between the objective of the IBC, which is resolution, not recovery, and its practical operation for operational creditors. While the Court did not alter the legal position, its suggestion that the Law Commission and the Legislature revisit the treatment of operational creditors is an important policy signal. Any future reform will need to preserve the efficiency of the IBC while ensuring that suppliers and MSMEs are not left with a remedy that becomes less effective once insolvency proceedings actually begin.