By - King Stubb & Kasiva on April 11, 2023
The Insolvency and Bankruptcy Code, of 2016 is regarded as an important tool for the insolvency and bankruptcy cases of partnerships, companies, firms, and individuals. The objective is to facilitate the resolution of corporate bankruptcy within a limited period.
The Code introduces new and different types of concepts of ‘Financial Creditor’ and ‘Operational Creditor’. In the year 2017 the Hon’ble National Company Law Tribunal, Principal Bench, New Delhi in the case of Col. Vinod Awasthy v. AMR Infrastructure Limited where the tribunal had interpreted the definition of ‘Operational Creditor’ under the IBC Code to discover the applicability of the same to a flat purchaser.[1]
Financial Creditor is defined as “a person to whom the debt is owed including a person to whom such debt has been legally assigned”, explained under Section 5(7) of the Insolvency and Bankruptcy Code. Financial debt is defined under section 5(8) of IBC as debt along with interest, which is disbursed against the consideration for the time value of money and also includes any amount raised through the investment in debentures, bonds, or any other form of securities.
There are some of the rights and remedies which are available to financial creditors under the IBC:-
An operational creditor is defined as a person to whom the debt is owed which includes the person to whom such debt has been legally transferred, explained under Section 5(20) of the Insolvency and Bankruptcy Code. It refers to the debt which arises out of the provision of goods and services, including employment contracts and any amount which is payable under any law.
The insolvency proceedings can be initiated against a defaulting corporate debtor under the IBC if the debt owed is not paid within a limited period. The IBC provides a simple and quick dispute resolution mechanism for operational creditors to recover their outstanding due amounts from corporate debtors. However, the operational creditor must prove that a default has occurred and the debts owed are operational.
The main difference between financial creditors and operational creditors is their priority in the process of repayment hierarchy. Financial creditors are given priority over operational creditors in the case of liquidation.
Different preference is granted to financial creditors over operational creditors and this was challenged before the Apex Court in the case of Swiss Ribbons Pvt. Ltd and Ors vs Union of India that it is violative of Article 14 of the Indian Constitution and there was no intelligible differentia having relation to the material which are sought to be achieved by the Code.[2] The Apex Court had referred to the Bankruptcy Law Reforms Committee’s Report, Insolvency and Bankruptcy Bill, and Insolvency Law Committee’s report.[3]
The Court held that preserving the corporate debtor is important while enduring the maximum recovery for all the creditors is the objective of the Code, financial creditors are different from operational debtors.
The Insolvency and Bankruptcy Code 2016 gives the difference between financial creditors and operational creditors. Financial creditors are those who lend money to a company whereas operational creditors are those who provide the goods and services to a company in their common course of business. The nature of the claim is the main difference between them in the insolvency process. Financial creditors have a primary claim on the assets while operational creditors have a secondary claim. The IBC aims to balance the interests of both types of creditors and ensures a fair and transparent insolvency process for all the parties involved.
To complete a proper corporate insolvency resolution procedure against a debtor, it is important to explain that the creditor fits within the scope and extent of the definition of ‘Financial Creditor’ according to Section 5(7) and Operational Creditor Section 5(20) of the IBC. In the case of Mukesh Kumar vs. AMR Infrastructure Limited,[4] the tribunals are severe in construing the term of ‘Operational Creditor’ under the Code and refusing to accept the petitions when the petitioners do not come within the scope of IBC and have other remedies available.
Yes, the financial creditor is a person to whom the debt is owed, and it includes a person to whom a financial debt has been transferred legally.
The primary difference between the two types of creditors is that a financial creditor has extended financial support in the form of loans, advances, or other facilities, while an operational creditor has supplied goods and services to the Corporate Debtor.
The Committee of Creditors plays an important role in both cases. However, the members of the Committee of Creditors are elected differently for both types of creditors. For financial creditors, the Committee of Creditors is made up of all the financial creditors of the Corporate Debtor, whereas for operational creditors, the Committee of Creditors is made up of members elected by the operational creditor.
[1]C.P. No. (IB)-10 (PB)/2017.
[2](2019) 4 SCC 17
[3]https://ibbi.gov.in/BLRCReportVol1_04112015.pdf&https://ibbi.gov.in/uploads/whatsnew/7c9bde175431a4abb8c33bb105e1f2dd.pdf
[4](C.P No (IB)-30(PB/2017)
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