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Operational Creditor under IBC: An Introduction

Creditors Under The Insolvency & Bankrupcy Code, 2016

There are two kinds of creditors under the Insolvency & Bankruptcy Code , Financial Creditors and Operational Creditors. Section 5 (7) of the IBC defines Financial Creditors to mean �any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to' and Section 5 (20) of the IBC defines Operational Creditor to mean � A person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred' The basic difference between the two creditors are that their liabilities arise from different origins.

Financial Creditor

In order to classify as a Financial Creditor the amount that is owed by the Corporate Debtor should fall under the ambit of �Financial Debt' under Section 5(8) of the Code to mean �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'.

Operational Creditor

In order to classify as an operational debt the amount should fall under the ambit of 'claim' as defined under section 3 (6) of the Code and such a claim should confine within the definition of debt under the section 3 (11) of the Code and such a debt should confine under the 4 categories laid down by the section 5 (21) of the code which are:
  • Goods
  • Services
  • Employment
  • Government
In a recent case of Andal Bonumalla v Tomato Trading LLP There was an Agreement to deliver sugar and X paid ?34 lacs advance amount. Y refunded ?9 lacs but kept ?25 lacs and no delivery of sugar occurred, it was held by the Hon'ble NCLAT that when there is no supply of goods or services, and only advance amount was paid, it is not Operational Debt and X is not the Operational Creditor.

Initiation Of Corporate Insolvency Resolution Process By The Operational Creditor

Rights to Initiate Corporate Insolvency Resolution Process has been given to the Operational Creditors under section 8 & Section 9 of the Code, in case of default occurred by the Corporate debtors, corporate Insolvency Resolution Process can be initiated by the Operational creditors by delivering a demand notice to the corporate debtor for the payment of the default money under the section 8 of the code.

If the Operational creditor after 10 days of the delivery of the demand notice or invoice, that demands payment from the Corporate Debtor does not receive any payment or notice of dispute under Section 8 (2) of the code, by the Corporate Debtor the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process.

In order to initiate a corporate Insolvency Resolution process one has to succeed as an operational creditor and show that he falls under the section 5(20) and also fulfills all the requirements under the section 5(21) by showing that his claims is in respect of the provision of goods and services including employment or a debt in respect of repayment of dues.

It is seen by the purview of Section 9 of the Code that, if after the expiry of 10 days from the date of delivery of notice or invoice demanding payment under section 8 , there has not been any payment or any notice of dispute stating that the payment has already been done by the corporate debtor, an application along with a copy of the invoice demanding payment by the operational creditor to the Corporate debtor, an affidavit showing that there has been no notice given by the Corporate Debtor related to the dispute of the unpaid operational debt and in order to conform that there has been no payment made by the corporate debtor a copy of certificate maintaining the accounts of the Operational debtor from the financial institution is to be given the along with the said fees it to be filed by the Operational Creditor to the Adjudicating Authority (NCALT) for initiating a Corporate Insolvency Resolution. A Resolution Professional who will act as an interim resolution professional is also to be proposed by the Operation Creditor against whom there should be no disciplinary proceeding.

If the application under Section 9 (2) of the code has been completed and there has been no repayment of the unpaid debt and the notice of the payment has been delivered to corporate debtor, the adjudication authority may then within 14 days of the receipt of the application admit the application.

The main Objective of the Insolvency Bankruptcy Code being to assist the corporate body to pay all its debts and get back to one's feet, an effort is to be made by the adjudicating authority to manage it's power and by vesting it in a professional agency, to continue the business of the corporate body until a resolution plan is drawn up, which is to be done in a period of 6 months with a maximum extension of 90 days, It can thus be seen that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The Code is thus a beneficial legislation.

Written By:�Tanishka Khandewal, Students of Amity University

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