File Copyright Online - File mutual Divorce in Delhi - Online Legal Advice - Lawyers in India

Interpreting the term Creditor under Insolvency and Bankruptcy Code, 2016

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 financial debt.

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.

Law Article in India

Ask A Lawyers

You May Like

Legal Question & Answers

Lawyers in India - Search By City

Copyright Filing
Online Copyright Registration


Section 482 CrPc - Quashing Of FIR: Guid...


The Inherent power under Section 482 in The Code Of Criminal Procedure, 1973 (37th Chapter of th...

How To File For Mutual Divorce In Delhi


How To File For Mutual Divorce In Delhi Mutual Consent Divorce is the Simplest Way to Obtain a D...

Whether Caveat Application is legally pe...


Whether in a criminal proceeding a Caveat Application is legally permissible to be filed as pro...

The Factories Act,1948


There has been rise of large scale factory/ industry in India in the later half of nineteenth ce...

Constitution of India-Freedom of speech ...


Explain The Right To Freedom of Speech and Expression Under The Article 19 With The Help of Dec...

Copyright: An important element of Intel...


The Intellectual Property Rights (IPR) has its own economic value when it puts into any market ...

Lawyers Registration
Lawyers Membership - Get Clients Online

File caveat In Supreme Court Instantly