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Creditors Under Insolvency and Bankruptcy Code, 2016

Section 3(10) of the I&B Code defines creditors asany person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor, and a decree-holder;In other words, a creditor is any person who has claim over another person i.e. Debtor in terms of a right to receive payment. Debt in accordance with the code means “liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.

Types Of Creditors Under Insolvency and Bankruptcy

i. Operational [S. (20)];

ii. Financial [S. 5(7)];

iii. Secured [S 3(30)];

iv. Unsecured

v. Decree Holder

The I&B Code provides for various rights and remedies that can be availed by a creditor under the code and such creditors only have the right to initiate an insolvency suit against the corporate debtor. (Sec. 6 and Sec. 7 of the Code) The creditor who comes under either of the categories enjoys different privileges and protection in the Corporate Insolvency Resolution Process (CIRP). It is in this light that the maintainability of applications for initiating a corporate insolvency resolution process chiefly depends on the applicant first satisfying to the Tribunal that it falls either within the definition of Financial Creditor or Operational Creditor under the IBC.

Financial Creditor [S.5 (7)] – In accordance with the code Financial creditor means “any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to”. Under the definition in totality, the term ‘Financial Debt’ also needs to be understood which is defined as “a debt along with interest, if any, which is disbursed against the consideration for the time value of money”. Sec 5 (8) lays down the list of financial debts to be included.

The National Company Law Tribunal in its judgment of Nikhil Mehta V. AMR Infrastructure observed that financial debt “in reality was a transaction whereby one party had advanced a certain amount of monies against the consideration of an assured return”.

Operational Creditor [S. 5(20)] - The term “operational Creditor” according to the code means “ a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred”. The term ‘Operational debt’ has been defined as “a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.

The decision of NCLT in the matter of Vinod Awasthy V. AMR Infrastructure observed that “operational creditors are those whose liability from the entity comes from a transaction on operations. Thus, the wholesale vendor of spare parts whose spark plugs are kept in inventory by car mechanics and who get paid only after the spark plugs are sold is an operational creditor.” Operational creditors are not permitted to be part of the Committee of Creditors. Section 21(2) of the Code provides that the committee of creditors shall consist solely of financial creditors. Thus, IBC limits the right of an operational creditor to only attending the meeting of the Committee of Creditors.

Where One Can be Both? - In the Situation of cases, where a creditor has indulged in both, a financial transaction as well as an operational transaction, with the entity then the creditor can be considered a financial creditor to the extent of the financial debt and an operational creditor to the extent of the operational debt.

Basic Difference between the two: the difference between a financial creditor and an operational creditor is that a financial creditor is an individual whose relationship with the entity is a pure financial contract, such as a loan or debt security whereas, an operational creditor is an individual whose liabilities from the entity comes from a transaction on operations.

Therefore, Tribunals are reluctant in entertaining petitions from any person who does not fall under the definition of the financial creditor or operational creditor according to the IBC.

CIRP by either of the creditors: CIRP or Corporate Insolvency Resolution Process is one under which a company is declared insolvent if the company is inefficient to settle its debts to the creditors. There are two ways to evaluate corporate insolvency:

· The cash-flow test is the company currently or in the future, be unable to pay its debts when they fall due for payment.

· The balance sheet test is the value of the company’s assets less than the number of its liabilities, taking into account future liabilities.

The Process of CIRP:- CIRP can be initiated by making an application to the National Company Law Tribunal (NCLT) by the Financial Creditors under Section 7 or by Operational Creditors under Section 9 of the IBC, 2016 and also by the Corporate Debtor himself under Section 10 of the IBC, 2016. The basic departure from the old law and fundamental rule under this newly codified law is that a company which has gone insolvent cannot start the Liquidation process at the primary stage until and unless it has gone through the process of Corporate Insolvency Resolution Process (CIRP), under the said resolution process options for a revival of the company is looked into and if the said resolution process fails then only the company goes into liquidation.

The difference in the initiation of CIRP by different types of Creditors

For Financial Creditor [S. 7(1)] - On the occurrence of a default, a financial creditor shall either by itself or jointly with other financial creditors may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority.

For Operational Creditor [S. 8(1)] - On the occurrence of a default, the operational creditor may deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor. The operation creditor may file an application after the expiry of 10 days from the date of delivery of the notice or invoice demanding payment under Section 8(1) if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under subsection (2) of section 8.


Jayant Upadhyay is a 4th Year student of BA.LLB course currently studying in K.L.E. Society’s law college, Bangalore. As he writes this post, Jayant is interning with us.

You can contact him at https://www.linkedin.com/in/jayant-upadhyay-731856131/

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