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Review of Financial Creditors under IBC

Financial Creditors


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.

Meaning of Financial Creditor?

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-

  • Money that is borrowed against the payment of interest,
  • Amount raised through acceptance with any acceptance credit facility or its dematerialized equivalent,
  • Amount raised through any note purchase facility or through the issue of bonds, debentures, notes, loan stock, etc.,
  • Amount of liability with respect to any lease or hire purchase contract that is deemed as finance or capital lease,
  • Receivables either sold or discounted apart from any receivables sold on a non-recourse basis,
  • Amount raised through any other transaction like any forward sale or purchase agreement, having the commercial effect of borrowing.
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What is IBC?

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.

Who is a financial creditor?

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.

Home Buyers as Financial Creditors

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.

What is the procedure of filing application by financial creditors under IBC?

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.

  • A financial creditor can file an application for instituting corporate insolvency resolution process either itself or along with other financial creditors against a corporate debtor before an adjudicating authority.
  • The financial creditor has to make an application under sub-section (1) in prescribed form and manner along with the prescribed fee.
  • Then the financial creditor must furnish the following along with the application:-
  • Any record of default with the information utility or any such default record or evidence of default.
  • Name of the resolution professional who is to act as an interim professional.
  • Any other information as notified by the Board.
  • Within 14 days of the receipt of the application, the adjudicating authority shall confirm the existence of a default from the records of Information Utility or based on the evidence furnished by the financial creditor.
  • If the adjudicating authority finds that a default has occurred and the application is complete, and no disciplinary proceeding is pending against the proposed resolution professional, it shall admit such application. In case a default has not occurred, and the application is not complete, or if there is any pendency of disciplinary proceedings against the proposed resolution professional, it shall reject that application. However, the authority shall provide an opportunity to rectify such defects in the application.
  • The process of corporate insolvency resolution shall begin from the date of admission of the application.
  • Eventually, the adjudicating authority shall notify about its order regarding the application to both financial creditor and the corporate debtor or to the financial creditor as the case may be.

Difference between Financial Creditors and Operational Creditors

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 creditor means any person to whom a financial debt is owed, whereas an Operational creditor means any person to whom an operational debt is owed.
  • The meaning of the term debt under financial creditors means a debt with interest, if any, which is disbursed against the consideration for the time value of money whereas debt under operational creditors means a claim with regard to the provision of goods and services in respect of repayment of dues, payable to the government.
  • If a default occurs then a financial creditor may file an application for initiating resolution process either jointly or with other financial creditors against a corporate debtor before an adjudicating officer whereas, in case of the operational creditor, he may deliver a demand notice of unpaid operational debtor copy for invoice asking for payment of the amount involved in the default. Later the operation creditor may file an application.
  • For the appointment of interim resolution professional, a financial creditor may furnish the name of the proposed resolution professional along with the application, whereas an operational creditor shall propose a resolution professional to be an interim resolution professional.
  • The committee of creditors will comprise of only financial creditors and financial creditors of the corporate debt. The operational committee will not form a part of the committee of creditors. The operational creditors also don’t have the right to vote in the meeting of the committee of creditors.
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Emphasis on the financial creditors

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.

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