The term Creditor has been defined under the Insolvency and Bankruptcy Code
(IBC), 2016 to provide for an exhaustive definition of the classification of
creditors. This has in turn made it sine qua non to prove that the creditor
falls within the ambit and scope of the definition of either Financial Creditor
under Section 5(7) of IBC or Operational Creditor under Section 5(20) of the IBC
to initiate insolvency proceedings before the Tribunal. The Code also provides
for various rights and remedies which the creditor can avail under the
Insolvency Code. Conversely, the Code entitles only two types of creditors, viz.
operational and financial, besides the corporate debtor, to initiate an
insolvency suit against the corporate debtor.
Off late, there has been some confusion as to whether there could be a class of
creditors who are neither financial nor operational. It is unclear whether there
should be any categories of debt that should not get the protections and
privileges afforded to financial or operational creditors. In saying so, a
creditor who is classified as neither financial nor operational has no statutory
protection under the Code, nor do they have the ability to initiate an
insolvency resolution process. This outcome therefore appears contrary to the
intent and purposes of the IBC.
The Insolvency and Bankruptcy Code, 2016 has introduced for a new and distinct
concepts of the term Financial Creditor and Operational Creditor as opposed to
the traditional definition as provided in the Companies Act, 2013 which merely
connotes the term creditor, without any classification thereof. For the purpose
of proceedings under the Code, a distinction has been created between Financial
Creditors and Operational Creditors. Further, the classification under IBC has
been used to put the creditors on different pedestals at every stage of the
proceedings whether they pertain to the maintainability of applications, or in
relation to that of approval of resolution plan or even in the case of
distribution of assets in the case of liquidation. Therefore, to secure the
interests of the creditors, it is imperative for the creditors to be completely
aware of the range of rights available to them under IBC.
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.
• Determination of the term Creditor and its classification thereof:
The term Creditor has been defined under Section 2(10) of the Code, to mean any
person to whom a debt is owed. A debt refers to a liability or an obligation in
respect of a claim, due from any person. An essential part of the term claim is
that there arises a right to payment, or a right to remedy for breach of
contract, which gives rise to a right to payment . Therefore, in order to be
considered as a creditor of the corporate debtor, it is essential that a right
to payment arises. Likewise, persons or entities seeking a remedy of specific
performance, injunction, or any other remedy, which do not give rise to a
repayment, would not be considered to be a creditor.
The first classification of the term creditor under the Code is that of the
financial creditor, under Section 5(7) of the Code. In order to determine
whether a person is a financial creditor or not, the debt owed to such a person
must fall within the ambit of the term financial debt as under Section 5(8) of
the IBC. A financial debt has been defined under the IBC to mean a debt, which
is disbursed against the consideration for time value of money.
In Nikhil Mehta v. AMR Infrastructure, the NCLAT overturned the decision of
the Delhi NCLT, and looked at the underlying nature of the transaction and held
that this was not simply a contract to buy and sell commercial premises, but was
in reality was a transaction whereby one party had advanced certain amount of
monies against the consideration of an assured return, thus making it a
The second category of creditor under IBC is that of the operational creditor.
An operational creditor is defined under Section 5(20) of IBC . In order to
determine if an individual would fall within the definition of an operational
creditor, it must be determined by the background whether the debt owed to such
a person must fall within the definition of an operational debt as defined under
Section 5(21) of the Code.
• Primacy of financial creditors:
The treatment of creditors under the IBC is that of not an equal footing, but
that of primacy. As highlighted previously, financial creditors higher footing
than that of operational creditors, including the power to decide whether the
corporate debtor is to be liquidated. The report of the Bankruptcy Law Reforms
Committee, on whose recommendations the IBC is based, had felt that financial
creditors were better able to assess the overall conditions and that the
company thus can be made more willing to modify the terms of existing
liabilities. This was done to ensure that the process would be more efficient as
only financial creditors were on the committee of creditors.
It is true that banks and financial institutions, who would typically be the
financial creditors, as they are better equipped to assess the corporate
debtor’s business viability, as they predominantly run the business of providing
loans. The IBC however, does not impose on them a responsibility to take the
interests of other stakeholders into account . Although, as mentioned above, the
liquidation value due to operational creditors is statutorily protected under
the IBC, and the same may not be sufficient in all cases.
Pertinently, an appeal was preferred before the National Company Law Appellate
Tribunal in the case of Nikhil Mehta & Sons (HUF) & Ors. v AMR Infrastructure
against the decision of NCLT wherein the Tribunal held that a flat purchaser
with assured return agreement could not be termed as a financial creditor. The
Appellate Tribunal set aside the decision of the NCLT and treated them as
financial creditor and settled the question of whether a flat purchaser with
assured return could be called as a financial creditor. The Appellate Tribunal
accordingly remitted the case back to the Adjudicating Authority. Interestingly,
the situation could be different in, perhaps more common, cases of flat
purchasers without any agreement of assured return.
• Interpreting the term Creditor-A critical Analysis:
In the landmark case of Nikhil Mehta and Sons (HUF) and Others V. AMR
Infrastructure, brought forth into light a new category of creditors which
neither falls under operational or that of financial creditors.
Moreover, 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. Moreover, it also lays down that
each financial creditor shall vote in accordance with voting share assigned and
the resolution plan can be implemented only if it has been approved by 75% of
them. It is to be noted that, an operational creditor, irrespective of their
claim size is not allowed to be a member of the committee. Thus, IBC limits the
right of an operational creditor to only attending the meeting of Committee of
Creditors subject to the abovementioned threshold.
• Conclusion and Suggestions:
The lack of jurisprudence in this aspect and that of the difference in the
opinion of NCLT benches has given rise to a larger question as to whether the
legislature deliberately intended to exclude certain class of creditors who do
not meet the strict requirement of being a financial or operational creditor
from availing the remedy under the Code. Thus, the interpretation of the term
creditor would not be necessary as all the creditors would have to fall in
either the category of financial creditor or operational creditor.
It seems that the Code envisages a class of creditors to whom neither a
financial nor an operational debt is owed. With this amendment, it can be
anticipated that the courts and tribunals would now easily exclude certain
creditors, perhaps the flat purchasers and the likes, from invoking the Code and
may not get into the exercise of expanding the definition of financial debt and
operational debt in order to accommodate and provide remedy to all types of
creditors. This will create a rather peculiar situation wherein certain
creditors will have the only remedy of filing the claims before the Insolvency
Resolution Professional under the Code.