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The Insolvency and Bankruptcy Code, 2016 (IBC) has consolidated and amended the laws relating to reorganization and insolvency of corporate persons, partnership firms and individual firms. The sole intention of this legislation is to facilitate resolution of corporate bankruptcy in a time bound manner.
The IBC has introduced new and distinct concepts of ‘Financial Creditor’ and ‘Operational Creditor‘ as opposed to the Companies Act, 2013 which merely introduced the term ‘creditor’, without any classification thereof.
The maintainability of applications for initiating corporate insolvency resolution process chiefly depends on the applicant first satisfying the Tribunal that it falls either within the definition of ‘Financial Creditor’ or ‘Operational Creditor’ under the IBC.
In this article, we are particularly discussing the Order dated February 20, 2017, which was passed by the National Company Law Tribunal, Principal Bench, New Delhi in Col. Vinod Awasthy v. AMR Infrastructure Limited [(C.P. No. (IB)10(PB)/2017)], whereby the Tribunal interpreted the definition of ‘Operational Creditor’ under the IBC to ascertain the applicability of the same to a flat purchaser.
Prior to discussing the aforesaid Order, it is pertinent to first understand the definitions of ‘Financial Creditor’ and ‘Operational Creditor’ under the IBC.
A financial creditor is defined under Section 5(7) of the IBC 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“.
“a debt alongwith interest, if any, which is disbursed against the consideration for time value of money and includes-
An operational creditor is defined under Section 5 (20) of the IBC to mean “any person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred“.
Distinction between a financial creditor and operational creditor has been drawn by the Bankruptcy Law Reforms Committee in para 5.2.1 of its final report. It states:
“Here, the Code differentiates between financial creditors and operational creditors. Financial creditors are those whose relationship with the entity is a pure financial contract, such as a loan or debt security. Operational creditors are those whose liability from the entity comes from a transaction on operations… The Code also provides for cases where a creditor has both a solely financial transaction as well as an operational transaction with the entity. In such a case, the creditor can be considered a financial creditor to the extent of the financial debt and an operational creditor to the extent of the operational debt.”
It is clearly evident that the law makers have chalked out distinct definitions of ‘financial creditor’ and ‘operational creditor’ and that they are not to be interpreted as inclusive or exclusive of each other.
NCLT on ‘Operational Creditors’
In Vinod Awasthy v. AMR Infrastructure Limited [(C.P. No. (IB)10(PB)/2017)], the Hon’ble Tribunal while dismissing the Petition instituted under Section 9 of IBC at the admission stage itself, decided the issue of whether a flat purchaser would fall within the definition of an ‘Operational Creditor‘ as defined under Section 5(20) of the IBC to whom an ‘Operational Debt’ as defined under Section 5(21) of the IBC is owed.
The Tribunal observed that the framers of the IBC had not intended to include within the expression of an ‘operation debt’ a debt other than a financial debt. Therefore, an operational debt would be confined only to four categories as specified in Section 5(21) of the IBC like goods, services, employment and Government dues. The Tribunal held that the debt owed to the Petitioner (a flat purchaser in this case) had not arisen from any goods, services, employment or dues which were payable under any statute to the Centre / State Government or local bodies. Rather, the refund sought to be recovered by the Petitioner was associated with the possession of immovable property.
The Tribunal while deciding the question of whether a flat purchaser could be considered an operational creditor considered the observations of the Bankruptcy Law Reforms Committee in paragraph no. 5.2.1 of the Final Report:
“Operational Creditors are those whose liability from the entity comes from a transaction on operations. Thus, the wholesale vendor of spare parts whose spark plugs are kept in inventory by car mechanics and who gets paid only after the spark plugs are sold is an operational creditor. Similarly, the lessor that the entity rents out space from is an operational creditor to whom the entity owes monthly rent on a three-year lease.”
The Tribunal held that the Petitioner had neither supplied goods nor had rendered any services to acquire the status of an ‘Operational Creditor’.
It was further held that it was not possible to construe Section 9 read with Section 5(20) and Section 5(21) of the IBC so widely to include within its scope, cases where dues were on account of advance made to purchase a flat or a commercial site from a construction company like the Respondent especially when the Petitioner had other remedies available under the Consumer Protection Act and the General Law of the land.
In order to succeed in initiating corporate insolvency resolution process against a debtor, it is sine qua non to prove that the creditor falls within the ambit and scope of the definition of either ‘Financial Creditor’ under Section 5(7) or ‘Operational Creditor‘ under Section 5(20) of the IBC. From the case law discussed above, it is evident that the Tribunals are stringent in construing definition of ‘Operational Creditor’ under the IBC and are refraining from entertaining applications wherein the applicants are not strictly falling within the scope of the IBC and have alternate effective remedies available. The Tribunal has also in subsequent cases before it, namely, Mukesh Kumar v. AMR Infrastructure Limited [(C.P.No.(IB)-30 (PB)/2017)] and Pawan Dubey and Another v. J.B.K. Developers Private Limited [(C.P. No. (IB)-19 (PB)/2017)] passed similar orders.
 The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design, November 2015 (last read on 26th July 2017)
This article was authored by (L-R) Meghna Mishra, Partner and Ankit Rajgarhia and Riya Singh, Associates of Karanjawala & Company.