Answer By law4u team
The Insolvency and Bankruptcy Code (IBC), 2016, classifies creditors into financial and operational creditors. This distinction is vital as financial creditors play a central role in initiating and managing insolvency proceedings against defaulting corporate debtors. The rights, decision-making powers, and participation of creditors in the Corporate Insolvency Resolution Process (CIRP) largely depend on whether they are classified as financial creditors.
Definition of Financial Creditor
Legal Definition
As per Section 5(7) of the IBC, a financial creditor is any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred.
Financial Debt – Section 5(8)
A financial debt refers to a debt that is disbursed against the time value of money. This includes:
- Money borrowed against interest
- Bonds, debentures, and notes
- Lease or hire purchase agreements
- Receivables sold or discounted
- Derivatives or forward contracts
- Credit facility agreements
- Amounts raised under any other transaction having the commercial effect of a borrowing
Types of Financial Creditors
Banks and Financial Institutions
Traditional lenders who provide loans, credit lines, or bank guarantees.
Debenture Holders and Bondholders
Entities that invest in debt instruments like corporate bonds or debentures.
Homebuyers
Recognized as financial creditors by the Supreme Court and IBC (Amendment) Act, 2018, as their payments are considered financial contributions to real estate projects.
NBFCs (Non-Banking Financial Companies)
These act as creditors in retail loans, SME financing, and other commercial loans.
Asset Reconstruction Companies (ARCs)
If financial debt is assigned to ARCs, they become financial creditors.
Foreign Lenders
Lenders from outside India who provide cross-border loans or bonds to Indian corporates.
Rights and Role in CIRP
Right to Initiate CIRP
Financial creditors can initiate CIRP under Section 7 of the IBC if the default amount is ₹1 crore or more.
Formation of Committee of Creditors (CoC)
Only financial creditors form the CoC, which takes all key decisions during CIRP, such as approving resolution plans, replacing the resolution professional, or deciding on liquidation.
Voting Power
Financial creditors have voting rights in proportion to their debt share. Major decisions require 66% CoC approval.
Right to Information
Financial creditors have access to regular reports, updates, and assessments regarding the debtor’s financial status and resolution progress.
Secured vs Unsecured Financial Creditors
Secured creditors have rights over collateral in case of default.
Unsecured creditors participate in the resolution but may recover less, depending on the plan.
Importance in Resolution Process
Financial creditors ensure that only genuine, economically viable resolution plans are accepted.
Their financial expertise and stake in recovery make them key decision-makers.
Their consent is mandatory for the approval of any resolution plan under Section 30(4).
Example
A bank lends ₹10 crore to a manufacturing company for business expansion. After two years, the company defaults on repayment. The bank, being a financial creditor under IBC, files an application under Section 7 of the Code to initiate CIRP.
Outcome:
NCLT admits the application after confirming the default. The bank becomes part of the Committee of Creditors (CoC) and plays a critical role in evaluating resolution plans submitted by bidders for the distressed company.
