Exploring a Quasi-absolute priority rule for pay-outs to operational creditors in bankruptcy resolutions: Evidence from India

We show that the Absolute Priority Rule (APR), which prioritizes financial creditors over operational creditors in the distribution of proceeds in liquidation, is inappropriate and unfair during resolution and deprives the latter of their share of value in the reorganized concern. Using data from bankruptcy resolution cases under the Indian Insolvency and Bankruptcy Code (IBC) 2016, we examine an alternate Quasi-APR rule for equitable distribution and find that while in the aggregate, the operational creditors get pay-outs not significantly different from this rule, there is intra-group divergence created by the liquidation premium (the excess of resolution proceeds over liquidation value of assets), and the operational creditors' claim size. The actual dynamics conform to opportunistic behaviour by the financial creditors, moderated by certain factors. In the spirit of the modified Creditors' Bargain Theory and the Values-based theory, we propose the quasi-APR rule as a transparent and pragmatic solution towards value-conservation of the asset and equity. We recommend the Quasi APR-based payout to be made the minimum payout for the OCs.