Types of creditors under the Insolvency and Bankruptcy Code, 2016

The Insolvency and Bankruptcy Code, 2016, is one of the newest entries to the legal framework of the country. This code has been a much-awaited introduction to the financial laws in India and it aims at protecting the interests of small investors and make the process of doing business a cumbersome-less process. The only intention that this legislation bears is to facilitate resolution of corporate bankruptcy in a time bound manner.

With the advent of the IBC, the distinction between different types of creditors has become clearer and the process of resolution and liquidation of corporate debtors has become convenient. Under the IBC, different classes of creditors have different rights, privileges, and roles in the corporate insolvency resolution process (CIRP) and in the liquidation process.

Before we delve deep into the different categories into which the IBC classifies creditors, we need to understand who creditors are and what their legal incidents comprise.

A creditor is any person to whom a debt is owed. A debt is a liability or obligation in respect of a claim, due from any person. An essential part of the term claim is a right to payment, or a right to remedy for breach of contract, which gives rise to a right to payment. To be considered a creditor of the corporate debtor, therefore, a right to payment is essential. Someone seeking a remedy of specific performance, injunction, or any other remedy, which does not give rise to a payment, would not be considered a creditor. In other words, a creditor is any person who has a claim over another person (debtor) in terms of a right to receive payment.

The IBC has introduced new and distinct concepts of ‘Financial Creditor’ and ‘Operational Creditor’ as opposed to the Companies Act, 2013 which merely introduced the term ‘creditor’, without any classification thereof.

According to Section 5(7) of the IBC, a financial creditor means:

"a person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred".

In order to ascertain whether a person is a financial creditor, the debt owed to such a person must fall within the ambit a 'Financial Debt' as under Section 5(8) of the IBC.

A financial debt as defined under Section 5(8) of the IBC is:

"a debt along with interest, if any, which is disbursed against the consideration for time value of money and includes-

1. Money borrowed against payment of interest;
2. Any amount raised by acceptance under any acceptance credit facility or its de-materialized equivalent;
3. Any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;
4. The amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;
5. Receivable sold or discounted other than any receivable sold on non-recourse basis;
6. Any amount raised under any other transaction, including, any forward sale or purchase agreement, having the commercial effect of borrowing;
7. Any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;
8. The amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause"

In Nikhil Mehta v. AMR Infrastructure[1], the applicant creditor had paid the defendant real estate developer the full price of under-construction commercial premises, with the understanding that until possession of the completed premises were handed over to him, the defendant would pay him a fixed sum every month. Overturning the decision of the Delhi NCLT, the NCLAT 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 effect a transaction whereby one party had advanced monies against the consideration of an assured return, thereby giving it the character of financial debt.

On the other hand, an operational creditor is defined under Section 5(20) of the IBC as under:

"any person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred".

In order to ascertain whether a person would fall within the definition of an operational creditor, the debt owed to such a person must fall within the definition of an operational debt as defined under Section 5(21) of the IBC.

An operational debt is defined under section 5(21) of the IBC to mean:

"a claim in respect of the provisions of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority".

In Pawan Dubey v. JBK Private Developers Limited[2], the NCLAT gave one of the most prominent judgments in regard of operational creditors in which allottees of residential and commercial premises were held not to be operational creditors as the transaction did not involve “goods” or “services”.

In Col. Vinod Awasthy v. AMR Infrastructure Limited[3] too, the Hon'ble Tribunal while dismissing the Petition instituted under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) at the admission stage itself, decided the issue of whether a flat purchaser would fall within the definition of an 'Operational Creditor' as defined under Section 5(20) of the IBC to whom an 'Operational Debt' as defined under Section 5(21) of the IBC is owed.

The Hon'ble Tribunal while deciding the question of whether a flat purchaser could be considered an operation creditor considered the observations of the Bankruptcy Law Reforms Committee in paragraph no. 5.2.1 of the Final Report4:

"Operational Creditors are those whose liability from the entity comes from a transaction on operations. Thus, the wholesale vendor of spare parts whose spark plugs are kept in inventory by car mechanics and who gets paid only after the spark plugs are sold is an operational creditor. Similarly, the lessor that the entity rents out space from is an operational creditor to whom the entity owes monthly rent on a three-year lease."

The Hon'ble Tribunal held that the Petitioner had neither supplied goods nor had rendered any services to acquire the status of an 'Operational Creditor'.

The Hon'ble Tribunal has also in subsequent cases before it, example, Mukesh Kumar v. AMR Infrastructure Limited[4], passed similar orders.

The NCLT, Mumbai Bench when faced with the similar question in the case of DF Deutshe Fortait AG and Anr. v. Uttam Galva Steel Ltd.[5], adopted a different view. While deciding the question of whether interest could also be claimed as a part of operational debt by the operational creditor, the NCLT remarked, which deserves to be mentioned in full below:

“If we go through the definition of “financial debt,” it means that a debt along with interest is disbursed against the consideration for the time value of money and with an inclusive list specifying as to what category of debts will become financial debt. When it comes to operational debt, it is a claim made against the goods supplied and services rendered. There are two types of debts; one operational debt another financial debt, there cannot be a debt other than these two types. If it is a debt against the company, it has to invariably fall either under financial debt or operational debt and it has to read as either financial debt or operational debt, it can’t be said that a debt against the company for a, b, c reasons can’t be either financial debt or operational debt. The bottom line in respect to obligation is, a man should repay the value, either in cash or kind, to what he has taken, for this; we have to apply law in such a way that the claimant is provided a remedy. The premise for claim is whether “A” has taken something from “B” with a promise to pay back the value or not, if it is prima facie evident that claim has to be paid, then to see what law is applicable to ensure that it is repaid, but not to dismiss the claim on the ground it is not in accordance with law. Legal proposition is to be searched and applied to promote the cause not to negate the cause. We need not say that procedural justice is always subservient to substantial justice.”

Due to the recent establishment of the Insolvency and Bankruptcy Code, 2016, the NCLT and NCLAT has given varied opinions with respect to the types of creditors and what they entail, and they have failed to reach a definite conclusion about the nature of flat buyers or home buyers in the light of financial and operational creditors.