The Insolvency and Bankruptcy Code, 2016 (IBC) is a major law in India that helps manage situations where businesses, partnerships, or individuals can’t pay their debts. It organizes and simplifies the process of resolving financial troubles. A key part of this law is the role of financial creditors, who have a big say in deciding how to fix these financial problems. This article explains who financial creditors are, what kinds of debts they hold, and how courts have interpreted their role, using clear language and examples.
Unlock new career opportunities with The Legal School’s Certification in Bankruptcy & Insolvency Law: Corporate Restructuring & Debt Resolution, in collaboration with IndusLaw. This six-month program, led by industry experts, equips you with critical skills in insolvency litigation, financial distress management, and corporate rescue strategies. Earn a prestigious certificate and elevate your expertise in a rapidly evolving field!
Who Are Financial Creditors?
A financial creditor is anyone who is owed a financial debt. This includes banks, financial institutions, bondholders, and even home buyers in real estate projects. It also covers people or entities who have legally taken over someone else’s debt (like through an assignment or transfer). In simple terms, if someone owes you money because of a loan or similar financial arrangement, you’re likely a financial creditor.
The IBC defines financial creditors in Section 5(7) as:
Any person or entity owed a financial debt, including anyone who has legally received the right to collect that debt.
To understand this better, we need to look at what a financial debt is, as defined in Section 5(8) of the IBC:
A financial debt is money borrowed, along with any interest (if applicable), where the money is given with the expectation that it will be paid back over time. This concept of “time value of money” is key—it means the money is lent with the idea that its value depends on when it’s repaid.
Interestingly, the law says “interest, if any,” which means a debt can still be financial even if no interest is charged, as long as it involves the time value of money.
Key Requirement for Financial Debt
The main rule for a debt to be considered “financial” is that it must involve the time value of money. This means the money is given with the expectation that it will be paid back later, creating a time gap between lending and repayment. For example:
A bank loan with interest clearly involves the time value of money.
A home buyer’s payment for a future flat also counts because the developer uses that money now but delivers the home later.
Even if no interest is charged, the debt can still be financial if it’s structured around this time gap, as seen in cases like Nikhil Mehta and Sons vs. AMR Infrastructure Ltd.
Why Financial Creditors Matter in Insolvency
Financial creditors play a big role in the IBC’s insolvency process. They form the Committee of Creditors (CoC), a group that makes critical decisions, such as:
Approving or rejecting plans to save the struggling company (resolution plans).
Deciding whether to liquidate (sell off) the company’s assets if no plan works.
In the CoC, financial creditors have voting rights, and major decisions need at least 66% approval from them. This gives them a lot of power compared to operational creditors (like suppliers or service providers), who don’t get to vote in the CoC.
Learn about Insolvency Resolution by Operational Creditors under Section 8 of IBC.
What Types of Debts Count as Financial Debts?
The IBC lists several types of debts that qualify as financial debts under Section 5(8). Here’s a breakdown of these categories in simple terms:
Borrowed Money: Any money borrowed where interest is paid, like a bank loan.
Acceptance Credit: Money raised through a financial agreement where someone agrees to pay a bill on behalf of another party (like in trade finance).
Bonds and Debentures: Money raised by issuing bonds, notes, debentures, or similar financial instruments.
Leases and Hire Purchase: Payments owed for leases or hire-purchase contracts that are considered financial leases under Indian Accounting Standards (like leasing equipment or property).
Receivables: Money owed from selling or discounting receivables (like invoices), but only if the agreement allows the lender to claim the money back.
Other Borrowing-Like Transactions: Any deal that feels like borrowing, such as forward sale or purchase agreements, where money is raised with a repayment expectation.
Derivatives: Financial deals meant to protect against or benefit from changes in prices or rates, valued at their market worth.
Counter-Indemnity Obligations: Promises to cover losses for guarantees, bonds, or letters of credit issued by banks or financial institutions to support loans or purchases.
Guarantee Liabilities: Money owed because someone guaranteed a loan or debt listed above.
One special case is home buyers in real estate projects. The money they pay to developers (like for booking a flat) is treated as a financial debt because it’s like lending money to the developer, expecting a home in return. This was made clear through a 2018 amendment to the IBC and supported by court decisions.
Also read about Section 12A of IBC, 2016.
Judicial Interpretations on Financial Creditors in IBC
The definition of financial creditors has been shaped by court decisions, especially for unique situations like home buyers, guarantors, and loans from promoters or relatives. Let’s look at these cases:
1. Home Buyers as Financial Creditors
The Supreme Court in the case Pioneer Urban Land and Infrastructure vs. Union of India (2019) ruled that home buyers in real estate projects are financial creditors. Why? Because when home buyers pay for a house or flat, they’re essentially giving money to the developer with the expectation of getting a home later. This involves the “time value of money” since the payment is made now for something delivered in the future.
Before the 2018 amendment, some cases like Nikhil Mehta & Sons (HUF) vs. AMR Infrastructure Limited and Neelam Singh vs. Megasoft Infrastructure already treated home buyers under “assured return” schemes as financial creditors. The amendment made this official and applied it retroactively, meaning it covers past cases too.
This decision stirred debate because home buyers were traditionally seen as operational creditors (people owed money for goods or services). By classifying them as financial creditors, they gained more power in the insolvency process, which some argue creates an imbalance.
2. Guarantors and Indemnifiers
If someone guarantees a loan or promises to cover losses (indemnifies) for a financial debt, they might be considered a financial creditor—but only if the debt involves the time value of money. In Neeraj Bhatia vs. Devandra Ahluwalia, the court clarified that guarantors aren’t automatically financial creditors unless the debt they guaranteed meets the financial debt criteria. This has sparked discussions about guarantors’ rights under the Indian Contract Act, 1872 (Sections 140 and 141).
3. Loans from Promoters or Relatives
Sometimes, promoters (people who start or run a company) or their relatives lend money to a business without charging interest. Are these financial debts? In Shailesh Sangani vs. Joel Cardoso, the National Company Law Appellate Tribunal (NCLAT) said yes, as long as the loan involves the time value of money. For example, if the money is lent with an expectation of repayment over time, it counts as a financial debt, even without interest.
However, some critics argue this blurs the line between debt (money owed) and equity (ownership in a company). They point to Indian Accounting Standards (Ind AS 32), which define financial instruments, to say such loans might sometimes be more like equity than debt.
Summary
In simple terms, a financial creditor under the IBC 2016 is anyone owed a financial debt, which includes loans, bonds, leases, and even payments by home buyers in real estate projects. The key is that the debt must involve the time value of money, meaning it’s given now with an expectation of repayment or benefit later. Court rulings have expanded this definition to include home buyers, guarantors (in some cases), and even interest-free loans from promoters, as long as they meet the criteria.
However, these classifications have sparked debates about fairness, especially since financial creditors have more power in the insolvency process than others. The evolving interpretations by courts show that India’s insolvency law is still developing, balancing the rights of different creditors while trying to resolve financial distress efficiently.
Related Posts:
Financial Creditor Under the Insolvency and Bankruptcy Code: FAQs
Q1. Who is a financial creditor under IBC?
A financial creditor is a person or entity owed a financial debt, such as banks, bondholders, home buyers in real estate projects, or those with legally assigned debts, where the debt involves the time value of money (e.g., loans, bonds).
Q2. Who is an operational creditor under the Insolvency and Bankruptcy Code?
An operational creditor is a person or entity owed an operational debt, which arises from providing goods, services, or employment, or dues payable to the government (e.g., suppliers, employees, vendors).
Q3. What is the bankruptcy code for insolvency?
The Insolvency and Bankruptcy Code, 2016 (IBC) is India’s primary law for handling insolvency and bankruptcy, streamlining resolution processes for companies, partnerships, and individuals facing financial distress.
Q4. What is the Committee of Creditors under the Insolvency and Bankruptcy Code?
The Committee of Creditors (CoC) consists of financial creditors who make key decisions in the insolvency process, like approving resolution plans or opting for liquidation, requiring at least 66% voting approval.
Q5. What are the creditors' rights under IBC?
Financial creditors vote in the CoC, influencing resolution plans, while operational creditors can submit claims but lack voting rights. Both can recover dues as per the resolution plan or liquidation waterfall under Section 53.
