Who is a Creditor under IBC?

The Insolvency and Bankruptcy Code, 2016 (IBC) is one of the most important legal reforms in India. It provides a time-bound and structured mechanism to deal with insolvency and bankruptcy situations. One of the central concepts under the Code is that of a “creditor.” Understanding who a creditor is, the different types of creditors, and their rights and roles is essential to appreciate how the Code functions in practice.

Meaning of Creditor under IBC

Section 3(10) of the IBC defines a creditor as any person to whom a debt is owed. This definition is broad and includes different categories of creditors such as financial creditors, operational creditors, secured creditors, unsecured creditors, and even decree holders.

The inclusion of these categories shows that the Code recognises the diverse nature of debts and the people or institutions to whom such debts are owed. However, the rights, roles, and remedies available to these different creditors are not uniform. The Code makes clear distinctions between financial and operational creditors, between secured and unsecured creditors, and also gives clarity about the position of decree holders.

Types of Creditors under IBC

Financial Creditors

A financial creditor is defined under Section 5(7) of the IBC. It refers to any person to whom a financial debt is owed, and it also includes a person to whom such debt has been legally assigned or transferred.

A financial debt is a debt that is disbursed against consideration for the time value of money. This means that the money is lent with the expectation of a return over time. Typical examples include loans, debentures, bonds, and other financial instruments.

Key Criteria

• The debt must be disbursed against the time value of money.
• It must fall within the categories mentioned under Section 5(8), which include loans, debentures, guarantees, and similar instruments.
• Even if the debt is transferred or assigned, the person receiving it continues to be treated as a financial creditor.

Judicial Interpretations

• In B.V.S. Lakshmi v. Geometrix Laser Solutions Pvt. Ltd. (2017), the NCLAT clarified that for a person to qualify as a financial creditor, the debt must be disbursed against time value of money.
• In Pioneer Urban Land and Infrastructure Ltd. v. Union of India (2019), the Supreme Court held that allottees/homebuyers are to be regarded as financial creditors. The Court explained that homebuyers, by investing money in real estate projects, give advances that carry the character of financial debt.

This inclusion of homebuyers as financial creditors has had a significant impact on real estate insolvencies, giving them representation in the resolution process.

Operational Creditors

An operational creditor is defined under Section 5(20) of the IBC. It refers to a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.

An operational debt means a claim in respect of the provision of goods or services, including employment, or dues payable to the government. Thus, suppliers, vendors, employees, and service providers generally fall under this category.

Judicial Interpretations

• In Innoventive Industries Ltd. v. ICICI Bank (2017), the Supreme Court clarified that operational creditors are those whose claims arise from goods or services provided.
• In Suresh Narayan Singh v. Tayo Rolls Ltd. (2018), the NCLAT held that workmen of a company come within the meaning of operational creditors.
• In Rabobank v. Shailendra Ajmera (2019), the NCLAT observed that even when an operational debt is assigned to another person, the transferee will still be regarded as an operational creditor.
• In JK Jute Mill Mazdoor Morcha v. Juggilal Kamlapat Jute Mills (2017), the NCLAT held that trade unions themselves cannot be considered operational creditors because they do not provide services to the corporate debtor directly.

Thus, operational creditors cover a broad group, but their rights in the resolution process are different from financial creditors.

Secured Creditors

A secured creditor, as defined under Section 3(30), is a creditor in whose favour a security interest is created. Security interest refers to any right, title, or interest in property that secures the repayment of a debt.

This could include mortgages, pledges, charges, or any other form of security. The secured creditor has the advantage of recovering debts by enforcing security interests, even outside insolvency proceedings.

Judicial Interpretations

• In Tourism Finance Corporation of India Ltd. v. Rainbow Papers Ltd. (2019), the NCLAT held that a State Tax Officer does not automatically qualify as a secured creditor under Section 3(30).
• However, in the Rainbow Papers Ltd. case (Supreme Court, 2022), it was clarified that statutory dues owed to the State could also qualify as secured debts if a law specifically gives them that character. The Court explained that the definition of secured creditor under the IBC does not exclude governmental authorities.

This judgement gave government departments a stronger claim in the insolvency resolution waterfall.

Unsecured Creditors

An unsecured creditor is one who does not have any security interest to back the debt. These creditors rely solely on the debtor’s promise to repay. Examples include small suppliers who extend credit without security, or lenders who have not taken collateral.

In the event of insolvency, unsecured creditors are placed lower in priority under the distribution waterfall in Section 53 of the IBC. Their recovery rates are often lower compared to secured creditors.

Decree Holders

The definition of creditor under Section 3(10) of the IBC includes decree holders. However, their position under the Code has been a matter of judicial scrutiny.

Judicial Interpretations

• In Digamber Bhondwe v. JM Financial Asset Reconstruction (2019), the NCLAT clarified that merely being a decree holder does not give the right to initiate a corporate insolvency resolution process (CIRP) under Section 7 or Section 9.
• In Sushil Ansal v. Ashok Tripathi (2019), it was held that decree holders cannot be considered as financial creditors. Therefore, they cannot initiate CIRP with the sole objective of executing a decree.

These cases highlight that while decree holders are recognised as creditors, they do not enjoy the same rights as financial or operational creditors in initiating insolvency proceedings.

Roles and Rights of Creditors under IBC

The IBC gives creditors a central role in insolvency resolution. However, their rights and powers differ depending on the type of creditor.

Filing of Claims

All creditors have the right to file their claims during the resolution process. This ensures that their debts are recorded and considered during insolvency or liquidation.

Committee of Creditors (CoC)

The Committee of Creditors (CoC) is composed only of financial creditors. Operational creditors, though recognised, do not form part of the CoC unless there are no financial creditors. The CoC is the decision-making body that determines whether the company will be resolved through a plan or pushed into liquidation.

Priority in Distribution

The Code also provides a waterfall mechanism under Section 53 for distribution of assets in liquidation. Secured creditors are given higher priority compared to unsecured creditors. Operational creditors are also ranked differently from financial creditors. This structure provides predictability and fairness in the recovery process.

Differentiated Treatment

The IBC makes a clear distinction between financial and operational creditors in terms of rights, remedies, and participation. For example, only financial creditors have voting rights in the CoC, while operational creditors are entitled to receive payments as per the resolution plan but cannot control its approval.

Conclusion

The Insolvency and Bankruptcy Code, 2016 has redefined the landscape of debt recovery and insolvency in India. At the heart of the Code lies the concept of a creditor, which includes financial creditors, operational creditors, secured creditors, unsecured creditors, and decree holders.

The Code not only defines these categories but also assigns different rights, roles, and priorities to them. Judicial interpretations by the Supreme Court and NCLAT have further clarified the scope and limitations of each category, ensuring that the framework is applied consistently.