The new law on insolvency and bankruptcy i.e., the Insolvency and Bankruptcy Code, 2016 in India created a great deal of uncertainty around the eligibility of a complainant to initiate corporate insolvency resolution process. It majorly depends on the requirement of a complainant to be a “financial creditor” or “operational creditor” under the law.

Currently, homebuyers are stuck in a catch-22 situation clouded with confusion upon the interpretation of various new terms used in the code. Therefore, the applicability of financial creditor and operational creditor with respect to a homebuyer and a commercial real estate purchaser has been dealt within this article.

According to Section5(7) of the Insolvency and Bankruptcy Code, 2016, financial creditor has been defined as follows, 'A person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred'. In simple terms, any person who has a 'financial debt' owed to him under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 is a financial creditor.

The Code defines financial debt as follows, 'A debt along with interest, if any, which is disbursed against the consideration for time value of money and includes:

• Money borrowed against payment of interest
• Any amount raised by acceptance under any acceptance credit facility or its de-materialized equivalent
• Any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument
• 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 other such accounting standards as may be prescribed
• Receivable sold or discounted other than any receivable sold on non-recourse basis
• Any amount raised under any other transaction, including, any forward sale or purchase agreement, having the commercial effect of borrowing
• Any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account
• 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
• 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

An operational creditor, under Section 5(20) of the IBC, has been defined as follows- '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, which under Section 5(21) of the IBC, is as follows- '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'.

From a perusal of the given definitions, and according to the Bankruptcy Law Reforms Committee in para 5.2.1 of its final report, the difference between a financial creditor and an operational creditor is that a financial creditor is an individual whose relationship with the entity is solely based on financial contracts, such as a loan or debt security. Whereas, an operational creditor is an individual whose liabilities from the entity comes in the form of future payments in exchange for goods or services already delivered.

The report further states that the Code also provides for cases where a creditor has indulged in both, a financial transaction as well as an operational transaction, with the entity. In such cases, the creditor can be considered a financial creditor to the extent of the financial debt and an operational creditor to the extent of the operational debt.

Speaking on the matter, the National Company Law Tribunal, in the case of Col. Vinod Awasthy v. AMR Infrastructure Limited, held that 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 get 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 further held that the Petitioner had neither supplied goods nor had rendered any services to acquire the status of an 'Operational Creditor’.

Therefore, it is apparent from the above information that Tribunals are reluctant in entertaining petitions from any person who does not fall under the definition of financial creditor or operational creditor according to the IBC. To initiate business insolvency proceedings under the Code, this requirement must be satisfied. The NCLT has enabled a strict implementation of the new law on insolvency and bankruptcy.

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External Links:

• Insolvency and Bankruptcy Code, 2016 - www.mca.gov.in
• Indian Accounting Standards - www.mca.gov.in
• Bankruptcy Law Reforms - www.dea.gov.in