Decoding the Financial Creditor Under the IBC: Scope, Rights, and Judicial Clarity

The enactment of the Insolvency and Bankruptcy Code, 2016 (IBC) marked a paradigm shift in the way corporate insolvency is addressed in India. Central to the code is the distinction between financial creditors and operational creditors, as only certain creditors can initiate proceedings under Section 7 of the IBC for the initiation of the Corporate Insolvency Resolution Process (CIRP).

Understanding who qualifies as a financial creditor is pivotal for safeguarding creditor rights, ensuring proper application of insolvency provisions, and maintaining the integrity of the insolvency ecosystem.

While the definition of financial creditor may appear straightforward under Section 5(8) of the IBC, judicial interpretation and evolving case law have clarified nuances around debt types, debt assignment, and the entities that can assert financial creditor rights. This article explores the contours of the financial creditor concept and analyses key judicial pronouncements that have shaped its interpretation.

Definition and Scope of Financial Creditor Under the IBC

Section 5(8) of the IBC defines a financial creditor as: “A person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred.”

Several aspects emerge from this definition:

1. Financial Debt Requirement: The debt must be monetary in nature, encompassing loans, debentures, bonds, or other financial instruments.
2. Inclusivity: The definition is wide enough to cover assignees, meaning that debt purchased or transferred retains its status under the IBC.
3. Entity Neutral: The IBC does not restrict financial creditor status to traditional banks; other entities meeting the financial debt criterion can also qualify.

Thus, the critical factor is not the label of the creditor but the existence of a financial debt.

Banks and Financial Institutions: The Typical Financial Creditors

Banks and non-banking financial institutions (NBFCs) are the most common financial creditors. These entities provide loans or credit facilities to corporate debtors, and failure to repay enables them to initiate CIRP.

Key Case: M/s. Innoventive Industries Ltd. v. ICICI Bank Ltd. (2018) – In this landmark case, the Supreme Court underscored that banks, being creditors to whom a financial debt is owed, clearly fall within the definition of financial creditors. The Court emphasised that the classification under Section 5(8) depends on the substance of the debt, rather than the form or label of the transaction.

This decision provided clarity that any entity owed financial debt could assert creditor rights, reinforcing the principle of substance over form.

Financial Creditors vs. Operational Creditors

IBC distinguishes financial creditors from operational creditors, with the latter comprising suppliers of goods or services. While operational creditors can approach the Adjudicating Authority under Section 9, financial creditors utilise Section 7.

Key Case: Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2018) – The Supreme Court highlighted the importance of proper classification, emphasising that a financial debt entails a monetary obligation arising from lending or investment arrangements. Operational debts, even if overdue, do not confer financial creditor status for initiating CIRP.

This distinction is crucial because incorrect classification can lead to procedural challenges or dismissal of insolvency petitions.

Rights and Powers of Financial Creditors

Financial creditors enjoy a privileged status under the IBC, with rights that are both procedural and substantive:

1. Initiation of Insolvency Proceedings (Section 7):

Financial creditors can apply for the commencement of the Corporate Insolvency Resolution Process (CIRP) upon default. Unlike operational creditors, they are not required to demonstrate the absence of a dispute.

2. Committee of Creditors (CoC) Composition: Only financial creditors constitute the CoC, which exercises decisive control over the resolution process. They vote on resolution plans, approve interim finance, and decide on liquidation, with voting rights proportional to their exposure.

3. Priority in Liquidation (Section 53): In the event of liquidation, financial creditors, especially secured ones, are prioritised after insolvency resolution costs and workmen's dues.

4. Access to Information and Participation: Financial creditors are entitled to receive all relevant information from the resolution professional and participate in meetings, ensuring transparency and informed decision-making.

5. Challenge and Appeal Rights: They can challenge resolution plans that violate statutory requirements or discriminate against similarly situated creditors.

Assignment of Debt: Widening Financial Creditor Recognition

The IBC explicitly recognises assignment or transfer of financial debt, allowing the assignee to step into the shoes of the original creditor. This provision has strengthened the secondary debt market and provided liquidity avenues for creditors.

Key Case: Shree Metaliks Ltd. v. Union of India, NCLAT, 2020 – The Tribunal affirmed that debt assignment does not strip the assignee of financial creditor status. Courts have reiterated that once a debt is legally assigned, the assignee can initiate Section 7 proceedings, provided the debt qualifies as a financial debt.

Thus, entities acquiring distressed debt can function as financial creditors and seek recovery through CIRP.

Other Entities Qualifying as Financial Creditors

Beyond banks and NBFCs, the definition under IBC extends to other entities, including:

1. Debenture holders
2. Bondholders
3. Financial entities providing loans or credit facilities
4. Any person to whom financial debt is owed under a legally recognised agreement

Key Case: Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta & Ors., 2019 – In this case, the Supreme Court acknowledged that financial institutions outside traditional banking also qualify as financial creditors, provided they hold a valid financial debt. This expanded the definition and reinforced the principle that the economic substance of the debt matters more than the creditor’s corporate identity.

EPC Constructions India vs M/s Matix Fertilizers And Chemicals Limited, 2025 - in this case, the Supreme Court upheld the NCLAT’s and NCLT's decision that holders of Cumulative Redeemable Preference Shares (CRPS) are not "financial creditors" under the Insolvency and Bankruptcy Code (IBC).

Read more: EPC Constructions India vs M/s Matix Fertilizers And Chemicals Limited

Mr. Rakesh Kumar Jain vs M/s ADTV Communications Private Limited, 2023- The NCLAT in this case has ruled that if a decree is founded on a financial debt, the holder of the decree is considered a "Financial Creditor" for Sections 5(7) and 5(8) of the Insolvency and Bankruptcy Code (IBC).

Read more: Mr. Rakesh Kumar Jain vs M/s ADTV Communications Private Limited

Assets Care & Reconstruction Enterprise Limited vs Ankit Metal & Power Limited (NCLT 2024) - The Tribunal ( NCLT ) held that the assignee of the financial creditor is also a financial creditor under Section 5 (7) of the Insolvency and Bankruptcy Code, 2016 (IBC).

Read more: Assets Care & Reconstruction Enterprise Limited vs Ankit Metal & Power Limited

Judicial Clarifications on Financial Creditor Status

Courts have consistently emphasised that the determination of a financial creditor depends on the existence and validity of financial debt rather than mere labels or corporate forms.

Notable Cases:

• Reliance Commercial Finance Ltd. v. Jyoti Structures (2021, NCLAT) – The Tribunal clarified that the economic reality of the debt governs creditor status. If the entity has effectively lent money or extended financial facilities, it qualifies as a financial creditor.
• Transcon Skyline Pvt. Ltd. v. Union Bank of India, 2021 (NCLAT) – The Tribunal noted that proper documentation and acknowledgement of debt are essential, but even structured instruments such as debentures or assignment agreements confer financial creditor rights if the underlying debt exists.

These rulings make sure that creditors cannot be excluded merely because of procedural or technical reasons, thereby protecting the interests of genuine financial creditors.

Practical Implications for Corporate Insolvency

The identification of financial creditors has multiple practical implications:

1. Triggering CIRP: Only financial creditors can initiate proceedings under Section 7, making correct classification essential.
2. Debt Assignment: Transfer of debt allows for debt market development, enabling institutions to liquidate non-performing assets effectively.
3. Avoiding Disputes: Misclassification as operational creditors can delay insolvency proceedings and affect resolution timelines.
4. Investor Confidence: Clear recognition of financial creditor rights ensures confidence among lenders and investors in the insolvency framework.

The jurisprudence under the IBC has clarified that a financial creditor is any entity owed a financial debt, encompassing banks, NBFCs, debenture holders, bondholders, and legally assigned creditors. Landmark cases such as Innoventive Industries, Mobilox Innovations, and Essar Steel have reinforced the principle that substance over form determines creditor status.

Proper identification of financial creditors not only safeguards their rights but also ensures that the corporate insolvency resolution process functions efficiently, providing a robust framework for debt recovery and promoting investor confidence in India’s financial and corporate ecosystem.

The journey of defining financial creditors under the IBC continues to evolve, but the jurisprudence provides a clear roadmap: the existence of a financial debt, legal recognition, and adherence to procedural safeguards remain the pillars of financial creditor status.

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