Government sources said the Ministry of Micro, Small and Medium Enterprises has repeatedly warned that micro, small and medium enterprises are disadvantaged under the Insolvency and Bankruptcy Code. The ministry urged fairer representation for operational creditors in the Committee of Creditors to improve recoveries under the corporate insolvency resolution process. The Supreme Court raised similar concerns on July 18, noting that small operational creditors remain significantly disenfranchised under the IBC.

Operational debt owed to vendors and service contractors ranks below financial debt in the recovery waterfall, which reduces amounts available to operational creditors. Data from the Insolvency and Bankruptcy Board of India shows operational creditors receive less than one per cent of amounts distributed in liquidation, and recoveries under the resolution process are similarly low. The Ministry of Corporate Affairs was reported not to be considering a statutory mechanism to guarantee minimum recoveries for operational creditors.

The dispute in Tata Steel v Varsha arose from the Bhushan Steel insolvency, in which the successful resolution applicant agreed to pay financial creditors Rs 352 billion (bn) for admitted claims of Rs 560 billion (bn). Two operational creditors had collective claims of Rs 330 million (mn) but had earlier filed pending recovery suits, and their contingent claims were admitted at a notional value of Rs one each during the process. The Supreme Court held that an approved resolution plan is binding on stakeholders, which led to the extinguishment or reduction of the operational claims in the approved plan.

Insolvency experts and some lawmakers questioned whether corporate rescue goals should be achieved at the cost of smaller businesses with limited resilience. Members of the parliamentary select committee and several practitioners noted that international insolvency frameworks do not always distinguish between financial and operational creditors and can grant voting rights more broadly. The ministry continues to press for policy consideration to address the distributional effects of the code.