Difference between Financial Creditor and Operational Creditor under IBC, 2016

Currently, the validity of petitions to initiate a corporate insolvency resolution procedure is mostly dependent on the applicant first convincing the Tribunal that it is either a “Financial Creditor” or an “Operational Creditor” under the Insolvency and Bankruptcy Code, 2016. Under the IBC, 2016, a financial creditor and operational creditor are two critical components of the insolvency process.

On May 28, 2016, the most anticipated, the IBC, gained the President’s consent. The term “Creditor” is defined under Section 3 (10) of the Code:-

“Creditor” means any 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;”

Meaning of Financial Creditor

Section 5(7) of the Insolvency and Bankruptcy Code defines a “Financial Creditor” as:-

“A person who owes a financial debt, including anybody to whom such debt has been legally assigned or transferred.”

To determine if a person is a financial creditor, the debt owed to that person must come under the definition of a “Financial Debt” as defined by Section 5(8) of the IBC.

Section 5(8) of the IBC defines a “Financial Debt” as follows:-

“A debt, including any interest, that is disbursed in consideration for the time worth of money & includes:-

1. Borrowed money that will be repaid with interest;
2. Any sum raised by acceptance under any acceptance credit arrangement or its de-materialized counterpart;
3. Any sum raised as a result of a note purchase facility or the issuance of bonds, notes, debentures, loan stock, or other similar instruments;
4. The sum of any liability arising from a lease or hire purchase agreement that is classified as a finance or capital lease in The Indian Accounting Standards or other such accounting standards as specified;
5. Receivable sold or discounted other than a non-recourse receivable sold;
6. Any sum raised via any other transaction, along with any forward sale/purchase agreement, that has the commercial impact of borrowing;
7. Any counter-indemnity duty arising from a bank or financial institution’s guarantee, indemnity, bond, documented letter of credit, or other instruments;
8. The amount of any liabilities in relation to any of the guarantees or indemnities for any of the items specified to in sub-clause (a) – (h).”

Meaning of Operational Creditor

Section 5(20) of the IBC defines an “Operational Creditor” as:-

“Anyone who owes an operational debt, including anybody to whom such liability has been legitimately assigned or transferred.”

To determine if a person meets the criteria of an operational creditor, the debt owed to that person should meet the definition of an operational debt as established in Section 5(21) of the Insolvency and Bankruptcy Code.

Section 5(21) of the IBC defines “Operational Debt” as follows:-

“a claim for the supply of goods or services, as well as employment, or a debt for the repayment of dues originating under any legislation now in effect and payable to the Central Govt., any State or any regional government.”

Key differences between financial Creditor and Operational Creditor

• A financial creditor is someone who owes a financial debt, while an operational creditor is anyone who owes an operational debt.
• The phrase debt under financial creditors refers to a debt with interest, if any, that is distributed against the consideration for the time worth of money, while debt under operational creditors refers to a demand for the provision of goods and services in exchange for repayment of government dues.
• In case of any default, a financial creditor might file an application for initiation of a resolution process against a corporate debtor before an adjudicating officer either jointly or with other financial creditors, while an operational creditor might deliver a demand notice of unpaid operational debtor copy for invoice requesting payment of the amount which is involved in that default. The operational creditor may later file an application.
• A financial creditor may provide the name of the proposed resolution professional with the application for the appointment of an interim resolution professional, but an operational creditor must suggest a resolution professional to be an interim resolution professional.
• The creditor’s committee will be composed of only financial creditors and corporate debt creditors. The operational creditors will not be the members of the creditor’s committee. The operational creditors do not have the power to vote in the committee of creditor’s meeting.

Brief difference

Priority given to Financial Creditor

Financial creditors are given more priority since they comprise the creditor’s committee and have voting power, while operational creditors aren’t included in the committee of creditors. The fundamental problem is that some groups of operational creditors face discrimination since the statute’s provisions safeguard the rights and interests of Financial Creditors. This is supported by the fact that when the application is made by the operational creditors, the respective class has no right to formulate any suggestions during the meeting of the creditor’s committee.

View of Hon’ble NCLT on the Status of Operational Creditor

According to the Bankruptcy Law Reforms Committee in para 5.2.1 of its final report, the distinction between a financial creditor and an operational creditor is that a financial creditor is a person whose relationship with the entity is solely related to financial contracts, like a loan or debt security. An operational creditor, on the other hand, is an individual whose liabilities from the entity take the shape of future payments in return for products or services that have already been supplied.

According to the study, the IBC also provides for situations in which a creditor has engaged in both a financial and an operational transaction with the company. In such circumstances, the creditor can be classified as a financial creditor for the amount of the financial debt & an operational creditor for the amount of the operational debt.

In the case of Col. Vinod Awasthy vs. AMR Infrastructure Limited (C.P. No. (IB) 10 (PB)/2017), the National Company Law Tribunal determined that operational creditors are those whose responsibility/liability from the business arises from a transaction on operations. Therefore, an operational creditor is a wholesale vendor of spare parts whose spark plugs are retained in inventory by auto car technicians and who gets paid only when the spark plugs are sold.

Likewise, the lessor from whom the company rents space is an operational creditor to whom the company owes monthly rent throughout the course of a 3 year lease contract. The Hon’ble Tribunal further ruled that the Petitioner had not delivered any products or given any services in order to be designated as an ‘Operational Creditor.’

As a result of the above, it is clear that Tribunals are hesitant to hear petitions from anybody who does not meet the criteria of financial creditor and operational creditor as defined by the IBC. This condition must be met in order to begin business insolvency procedures under the IBC. The NCLT^[1] has made it possible for the new insolvency and bankruptcy law to be strictly enforced.

Conclusion

Read our article:Analyzing the scope of Immunity to Corporate Debtor