Meaning of Corporate Debtor, Financial Creditor, Operational Creditor under Insolvency and Bankruptcy Code.

Introduction

We will explain 3 terms in this post
  1. Corporate debtor
  2. Financial Creditor
  3. Operational Creditor

Corporate Debtor

Corporate Debtor is company which owes money to others like Banks or investor etc.

Section 3(8) of the Insolvency and Bankruptcy Code 2016 (Hereinafter referred as IBC) defines the Corporate Debtor as

"Corporate Debtor" means a corporate person who owes a debt to any person.

Financial Creditor

These are banks or financial institution or rich individuals. They give loan and their relationship with Debtor is pure financial contract. "I give you loan, you return me with interest or some additional amount". That's it. It also includes when loan by such bank is transferred or assigned to other bank or institution.

When SBI gives a loan to company, they become Financial Creditor
When LIC buys bods of a company, they become Financial Creditor.
When you give loan to company when company says they will return you more money, you become financial creditor. (Of course, you don't have money to lend to Company, if you had you wouldn't be reading this blog poor man!)

Technically it's defined in Section 5(7) of the IBC which is:

"financial creditor" means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.
This definition have used the word "financial debt". What is that ?
 
 Financial Debt is defined in Section 5(8) of the IBC. It's quite a lengthy definition. It's generally a principal amount as well interest on that principal, but it includes many things like buying debentures from a Company, or buying bonds from company where company should return the money once the bond matures.  Sometimes Company say lend me 1000 Rs, get 1200 Rs at the end of the year, in this case when you give those 1000 Rs you become financial creditor.

Code gives detailed definition of "Financial Debt" as below.

 “financial debt” means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes—

        a) money borrowed against the payment of interest;

(b) any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent;

(c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;

(d) 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 such other accounting standards as may be prescribed;

(e) receivables sold or discounted other than any receivables sold on nonrecourse basis;

(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;


Explanation. -For the purposes of this sub-clause,-

(i) any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and

(ii) the expressions, “allottee” and “real estate project” shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);

(g) 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;

(h) 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;

(i) 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;

So this is all about huge definition of Financial Debt.

Now let's discuss what does operation creditor mean.

Operational Creditor

Suppose you are supplying a raw material for a company. You don't get money the moment you deliver the raw material, rather you supply raw material on credit. Company pays you after two months after you actually deliver the raw material. You are Operational Creditor.

Section 5(20) of the Code defines Operational Creditor as

"Operational Creditor" means a person to whom an operational debt is owed and include any person to whom such debt has been legally assigned or transferred.

Here the word "operational debt" is used. Section 5(21) of the act define what operational debt is

"Operational Debt" means a claim in respect of the provision of goods and service including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central government, any State Government or Any local authority

This definition includes below persons/entities who can be an operational creditor
  1. Central Government/State Government when Company owes taxes to them
  2. Employees if Company owes salary to such employee.
  3. Claim in respect of provision of goods and service. In above example wherein you provide raw material, you are operational creditor

Conclusion

This terms are massively used in IBC hence it's pertinent to understand them in order to understand insolvency proceedings.





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