Financial and Operational Creditors under IBC, 2016
In order to efficaciously initiate Corporate Insolvency Resolution Process (CIRP)
against a debtor, it is the sine qua non to attest that the creditor falls
within the ambit and scope of the definition of either 'Financial Creditor' u/s.
5(7) or 'Operational Creditor' u/s. 5(20) of the IBC, 2016.
Financial creditors are those who have legally disbursed funds to the corporate
debtor "against consideration for the time value of money". To ascertain a
financial creditor, the debt owed must fall within the ambit of a 'Financial
Debt' as u/s. 5(8) of the Code. On the other hand, 'Operational Creditors'
determine numerous liaisons with the debtor company, by providing goods or
services, employment or government dues etc.
In Col. Vinod Awasthy v AMR Infrastructure Limited
, a distinction was
drawn out where the court dismissed a petition u/s.9 of IBC, 2016 on the issue
of whether 'flat purchaser' or homebuyer fell within the definition of s.5(20)
of 'Operational Creditor'. It was held that IBC did not intend to include within
the expression of an operational debt, any debt other than a financial debt and
therefore an operational debt is restricted to classifications specified u/s.
Homebuyers are primarily protected under Articles 32 and 142 of the Indian
Before the Insolvency and Bankruptcy (Amendment) Act 2018, homebuyers were not
covered under the scope of either 'financial creators' u/s 5(7) or 'operational
creditors' u/s. 5(20) of the initial IBC, 2016 Code. Despite insinuating that
all companies under the Companies Act, 2013 fall u/s. 2(a) of the Code, no
clarity was laid on the ambit of Homebuyers and Real Estate Players.
After an application to initiate Insolvency Process u/s. 7 of the Code was
shifted to National Company Law Tribunal (NCLT), in the case Nikhil Mehta & Sons
& Ors v AMR Infrastructure Ltd , NCLT held that the period of committed
return from the execution of an MOU to the possession of the unit(s) does not
acquire the status of a 'Financial debt' due to any failure, and come within the
scope of a 'Financial Creditor'. Later, this judgement was overruled by National
Company Law Appellate Tribunal (NCLAT), and it was held the appellants did fall
under the ambit of a 'Financial Creditor'.
Chitra Sharma & Ors v Union of India & Ors
 brought up the issue of the
Homebuyer's exclusion from the IBC, 2016 and it is violating their fundamental
right to life, as well as homebuyers being disentitled from becoming part of the
Committee of Creditors despite being one of the most significant contributors of
finance in real estate. It was also inequitable to render them remedy less if a
moratorium is granted to certain parties u/s. 13 and 14, of the Code.
Insolvency and Bankruptcy (Amendment) Act, 2018
Through the statutory amendment to the Code, Homebuyers were duly at par with
'Financial Creditors', and now could subsequently initiate provisions of the IBC
in case of any delay in possession or repudiation. This Amendment was subject to
judicial scrutiny in Pioneer Urban Land and Infrastructure Limited v Union of
India & Ors.
, where it was found that delay in completion of apartments
was widespread and the funds raised from the home buyers drastically aided in
financing these constructions.
Therefore, it was crucial to treat homebuyers as financial creditors. The
judgement concluded that the Amendment didn't infringe Articles 14, 19(1)(g)
read with Article 19(6), or 300-A of the Constitution of India and that RERA is
to be read amicably with The Code, but The Code prevails through any incident of
The Insolvency and Bankruptcy (Amendment) Act, 2020
The 2020 Amendment passed by the central government unduly altered the modus
operandi in initiating the CIRP and placed a cap on the number of Homebuyers/Allottees
approaching the NCTL u/s 7 of the IBC, 2016. The 2nd proviso declared that for
homebuyers to contact NCTL, there must be either 10% of the allottees of the
project or 100 homebuyers whichever is less. The applicability of this ordinance
seemed impractical as the implementation was problematic and a fallacy of
The 2020 Amendment Act, u/s. 3 establishes brand new obstacles for the
homebuyers without exploiting their statutory status as financial creditors. It
discourages entertaining individual claims and endorses only class action suits.
The Amendment mandates homebuyers to satisfy the minimum members' requirement,
even if the debt that is individually owed to them far exceeds the number of Rs.
1 Lakh which hitherto allowed all financial creditors to initiate the CIRP, this
sinister stipulation deters homebuyers from reaping benefits available to all
other financial creditors and puts them at a disadvantage.
It operates on the assumption that all the allottees have been identified, and
that there is a network of communication among them and that there are no
pending cases before the NCLT. Moreover, since the Amendment applies to the
present petitions, homebuyers without a court order who are already before the
NCLT, must file an amendment in their application within 30 days and fulfil the
new threshold or else the case will be considered withdrawn.
Individual homebuyers who do not fulfil the requirement above (s), are at the
mercy of the Committee of Creditors (COC) as they don't partake in the
decision-making process and once the moratorium is granted in any other petition
before NCLT, it will put homebuyers at abeyance.
A bare reading of the new provisions makes it apparent that the Amendment has
been designed to protect private developers rather than enabling unintended
citizens. Non-adherence to the mandatory provision will undeniably lead to the
quashing of the homebuyer's application and may well prevent genuine and
bonafide cases from being brought before the court of law.
The Amendment was ineffective in addressing the vital issue of determination of
the status of the homebuyers as 'secured' or 'unsecured' creditors during the
inbound cascade of liquidation and the system of recovery of money for an
individual homebuyer in case no other creditor is accessible.
- Col. Vinod Awasthy v. AMR Infrastructure Ltd., 2017 Indlaw NCLT 101
- Nikhil Mehta & Sons v. AMR Infrastructures Ltd., 2017 Indlaw NCLAT 60.
- Chitra Sharma & Ors. v. Union of India & Ors., (2017) 143 SCL 680 (SC).
- Pioneer Urban Land and Infrastructure v Union of India (2019 SCC OnLine