Key points
- A financial creditor lends money against the time value of money: loans, bonds, guarantees and, since 2018, real estate allottees.
- An operational creditor is owed for goods, services, employment or government dues.
- Section 7 requires only proof of debt and default; Section 9 requires a prior demand notice and fails if a genuine dispute exists.
Who is a financial creditor
Section 5(7) and 5(8) define financial debt as a debt disbursed against consideration for the time value of money, including loans, deferred purchase price with a commercial effect of borrowing, lease finance, and amounts raised under any transaction having the commercial effect of a borrowing. Allottees under real estate projects are deemed financial creditors. The Supreme Court in Anuj Jain v. Axis Bank (2020) held that a mortgagor who merely provides security for another's loan is not a financial creditor.
Who is an operational creditor
Section 5(20) and 5(21): a person owed an operational debt, meaning a claim for goods or services, including employment, or dues to the Central or State Government or a local authority.
Applications compared
Under Section 7 the applicant files Form 1 with records of default from an information utility or other evidence; the NCLT must admit if a debt and default of one crore or more are shown, subject to the limited discretion recognised in Vidarbha Industries v. Axis Bank (2022). Under Section 9 the applicant must first serve a Section 8 notice, wait 10 days, and file Form 5; the application is rejected if a pre-existing dispute is shown.
Rights after admission
Financial creditors form the committee of creditors and vote on the resolution plan by value. Operational creditors have no vote (unless there are no financial creditors) and receive at least the liquidation value under Section 30(2)(b). In liquidation, secured and workmen's dues rank first, then unsecured financial creditors, with operational creditors below them.
Frequently asked questions
Can a creditor be both financial and operational?
Yes, in respect of different transactions with the same debtor, for example a supplier who has also extended a loan. Each claim is classified separately.
Is a homebuyer a financial creditor?
Yes, by the explanation to Section 5(8)(f) inserted in 2018, but since 2020 an application under Section 7 must be filed jointly by at least 100 allottees or 10% of the allottees of the project.
Can the corporate debtor itself apply?
Yes, under Section 10, if it has committed a default and is not disqualified under Section 11.
Related practice area: Insolvency & Bankruptcy
This article is for general information and does not constitute legal advice. Laws, rules and limitation periods change and depend on the facts; please take advice on your own situation before acting. Reading this article does not create a lawyer-client relationship with Akhtars Legalitarian.