Financial and Operational Creditors under the Insolvency and Bankruptcy Code, 2016
Through the medium of this write-up, the author seeks to elucidate upon Financial and Operational Creditors under the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the “Code”), the difference between them and their rights in the Resolution Process.
Financial Creditors, as defined under Section 5(7) of the Code are financial lenders of the Corporate Debtors i.e., they have provided funds to the entity, and their relationship is strictly a financial contract such as a loan or a debt security. On the other hand, Operational Creditor as defined under Section 5(20) of the Code refers to an entity that has provided inputs or other materials in the form of goods or services to the Corporate Debtor, the payments for which have been defaulted by the Corporate Debtor.
Difference between Financial Creditor and Operational Creditor
|Particulars||Financial Creditor||Operational Creditor|
|Meaning||Any person to whom the Corporate Debtor owes a financial debt, eg. Loan, Debt Security||Any person to whom the Corporate Debtor owes an operational debt i.e., money for a good or service provided by the creditor|
|Meaning of Debt||Debt here refers to the money including interest that is payable by the Corporate Debtor to the creditor under the financial contract||Debt here refers to the amount payable by the Corporate Debtor to the Creditor for the goods or service (also includes employment) provided.|
|Voting Share at Committee of Creditors||The voting share of a Financial Creditor in a CoC is in proportion to the financial debt owed to the Creditor. A minimum of 75 percent of voting shares is essential||The Operational Debtor has no voting share at the meeting of Creditors|
|Initiation of Insolvency Resolution Process||Under Section 7(1) of the Code, the Financial Creditor, jointly with the other Financial Creditors or individually may file an application for initiating the Insolvency Process before the Adjudicating Authority||Under Section 8(1) of the Code, the Operational Creditor may deliver a demand notice to the Corporate Debtor demanding the repayment, and may file an application with the Adjudicating Authority after the expiry of 10 days from the day of serving of notice if the Operational Creditor does not receive the payment or a notice of Dispute under Section 8(2)|
|Appointment of Resolution Professional||As per Section 7(3) of the Code, the Financial Creditor SHALL along with the application filed furnish the name of a Resolution Professional who will act as the interim resolution professional||As per Section 9(4) of the Code, an Operational Creditor MAY propose a resolution professional who shall act as the interim resolution professional|
|Committee of Creditors||All Financial Creditors are a part of the committee||Operational Creditors do not form a part of the committee|
|Submission of Financial Information||As per Section 215(2) of the Code, it is compulsory for a Financial Creditor to furnish the financial records of the transaction between the Creditor and the Corporate Debtor||As per Section 215(3) of the Code, it is not compulsory for an Operational Creditor to furnish the Financial Information regarding the transaction that took place between the Creditor and the Corporate Debtor|
Rights of Creditors:
- Right to Initiate Insolvency Proceedings: On the outset, it can be noted that both financial as well as operational creditors have the right to file an application with the Adjudicating Authority to initiate the Insolvency Resolution Proceedings against the Corporate Debtor, but the situation for the category of creditors is different. On one hand where the Financial Creditor can directly file an application with the Authority to begin the proceedings, an Operational Creditor has to first serve a demand notice or invoice to the Corporate Debtor demanding the clearance of the dues, and if the Corporate Debtor does not reply within 10 days from the date of delivery of notice or he does not serve a notice of dispute to the Creditor, then only can the Operational Creditor proceed to file an application with the Adjudicating Authority.
- Right to Vote in the Committee of Creditors: The Committee of Creditors is the body that represents the creditors of the Corporate Debtors and takes the decisions on behalf of the creditors in the resolution process. The Code provides that only the Financial Creditors will constitute the Committee. A resolution plan will be implemented only if it is passed in the CoC by a majority of minimum 66%. Only those Operational Creditors whose dues amount to at least 10% of the total dues are invited to the meeting of the Committee. It is to be noted that these Operational Creditors shall not have any voting power in the matters of the committee. Therefore, those Operational Creditors who fulfil the threshold limit are allowed to sit in the meeting, but the voting power lies completely with the Financial Creditors.
- Right to Higher Remuneration: Through the third amendment in the Insolvency and Bankruptcy Code 2019, the power to determine the manner of distribution of the proceeds from the resolution plan lies in the hands of the Committee of Creditors, and the Committee consists only of the Financial Creditors, therefore it can be deduced that the Financial Creditors have priority in the case of the distribution of the proceeds from the resolution process of a Corporate Debtor.
- Rights in the Case of Liquidation of the Corporate Debtor: In case the CoC fails to approve a resolution plan within the stipulated time period or it calls for the liquidation of the Corporate Debtor, the Adjudicating Authority will appoint a Liquidator who will sell of the assets of the Corporate Debtor. The money so procured will be distributed among all the creditors. The right of the Operational Creditors to remuneration is equal to that of the Unsecured Financial Creditors, but the right of both these creditors is less than the right of the Secured Financial Creditor to recover his debt.
Written By: Abeer Chawla
- Insolvency and Bankruptcy Code, 2016
- Parmar, Niddhi. “DIFFERENCE BETWEEN OPERATIONAL AND FINANCIAL CREDITORS.” http://vinodkothari.com/, June 2019. http://vinodkothari.com/wp-content/uploads/2019/06/Difference-between-OC-FC.pdf.
- Gursale, Aarohee, and Sana Khan. “Financial Creditor And Operational Creditor Under The Insolvency And Bankruptcy Code, 2016.” Mondaq, July 4, 2017. https://www.mondaq.com/india/insolvencybankruptcy/607738/financial-creditor-and-operational-creditor-under-the-insolvency-and-bankruptcy-code-2016.
- Jose, Tojo. “What Is Financial Creditors and Operational Creditors under the IBC?” Indian Economy, August 18, 2019. https://www.indianeconomy.net/splclassroom/what-is-financial-creditors-and-operational-creditors-under-the-ibc/.