The prominent problem in the country right now is the alarming volume of Non-Performing Assets...
According to the Insolvency and Bankruptcy Code with respect to the Insolvency of corporate persons, the proceeding for the same can be initiated by the financial creditor, corporate creditor, or the operational creditor. The procedure to be followed and the method of instituting the proceedings are different for every above-mentioned category of creditors. As far as the financial creditor is concerned, the application for instituting a resolution process may be made even without waiting for raising a claim for the money, and there is no further need to prove that no dispute exists for the payment under consideration.
The financial creditor has a special place and a critical role to play in this. A financial creditor is entitled to be a member of the committee of creditors and shall have the right to vote in the proceedings of approving the resolution or the resolution plan and other matters with respect to proceedings of the committee of creditors. The creditor’s classification itself is very vital with regard to financial creditors or the operational creditors and is important to the resolution process as well.
Financial creditors are someone whose relationship with the entity is based on a financial contract like a loan or debt security. Under IBC, 2016, a financial creditor is a person to whom a financial debt is owed. It also includes a person to whom the financial debt has been legally transferred or assigned. In other words, a person who has a financial debt owed to him under IBC, 2016 is a financial creditor.
For a better understanding of financial creditors, we need to look at some other relevant definitions.
Debt– The code under section 2(11) defines debts as a liability or an obligation with respect to a claim that is due from any person and which includes financial and operational debt.
Claim– The code under section 2(6) defines a claim as a right to payment, whether or not such right has been reduced to judgment, fixed, undisputed, disputed, equitable, legal, secured or unsecured and also means right to seek remedy under any law for breach of contract, if such breach of contract gives rise to the right of payment, whether or not such right has been reduced to judgment, fixed, undisputed, disputed, secured or unsecured.
Financial Debt– The code under section 5(8) defines financial debt. It means a debt with interest, if any, that is disbursed against the consideration for the time value of money. It includes the following-
IBC stands for Insolvency and Bankruptcy Code. IBC is a law that intends to consolidate the existing framework by making a uniform code for Insolvency and Bankruptcy. Insolvency and Bankruptcy Code was executed through an act of Parliament. The law was initiated due to a large number of non-performing loans of banks and sluggishness in debt resolution. The code received the assent of the President on May 28th, 2016.
The object of the IBC is to ensure a smooth and economically viable resolution for resolving insolvencies. It aims to protect the interests of small investors. IBC helps in improving the ease of doing business.
If we closely examine the definition of financial creditor, the words used in it are “Means,” which tells us that the definition is restrictive. It covers only those transactions which comply with the terms mentioned in the definition and nothing else.
For someone to be covered under the meaning of financial creditor, there must be debt and interest is not necessary. If we examine the definition again, we know that if the debt is disbursed against the consideration for the time value of money, then only does it qualify to be a financial creditor. If it doesn’t satisfy this condition, then it doesn’t qualify to be a financial creditor.
In the past, we have seen duping by realtors widely. Due to a lack of proper regulation and control over their work, many home buyers are susceptible to such practices. The helpless homebuyers were paying the EMIs for the home loans, and many of them spent all of their savings in paying the EMIs. Many cases have been filed lately related to insolvency before the National Company Law Tribunal by several real estate and housing development companies. The moratorium period under IBC, 2016, begins once the application for insolvency is admitted.
Due to that moratorium period, the petition filed by the home buyers gets abated. This further downgrades their position, leaving them remediless. The difficulty faced by the home buyers was tended to by the union government. They realised the condition of the home buyers, and it brought an amendment to the Insolvency and Bankruptcy Code to treat the home buyers as financial creditors under the said code. The Supreme Court held that the amendments were made based on the reports of the Insolvency Law Committee to deter realtors from deceiving the home buyers.
Read, Also: Insolvency and Bankruptcy Board of India.
The procedure of filing application by financial creditors is specified in section 7 of the Insolvency and Bankruptcy Code, 2016. The procedure has been discussed below.
Financial creditors and operational creditors are two very vital parts of the insolvency process under the Insolvency and Bankruptcy Code, 2016. Now let us look at the key differences between the financial and operational creditors under the code.
Financial creditors are prioritised more as they constitute the committee of creditors, and they can also participate in the voting process, but the fact of the matter is that the operational creditors are not included in such a group of creditors. The critical issue is that certain classes of operational creditors are discriminated against as the provisions of the statue protect the rights and interests of the Financial Creditors. This can be corroborated by the fact that when the application is filed by the operational creditors, the respective class doesn’t have any right to frame any suggestion in the meeting of the committee of creditors.
As stated earlier, the financial creditor has got a special place, and it has an important role to play. The IBC clearly provides a special preference to the financial creditor as compared to the operational creditor through many procedures. Though, smooth and time-bound processes through the filing of the petition and transparency through information utility have benefitted all the creditors under the IBC. The time-bound process to get the recovery and related process and timely recovery of the money with interests has only improved the overall functioning of the financial setup.
See Our Recommendation: What is new under National Company Law Tribunal, NCLT Amendment 2020.