Financial Creditor

IBC, 2016 — Section 5(7)

Under the IBC, a person to whom a "financial debt" (money borrowed with interest) is owed by the corporate debtor. Banks, NBFCs, bondholders, and debenture holders are financial creditors. Financial creditors form the Committee of Creditors and have voting rights on the resolution plan. Distinguished from operational creditors (suppliers, employees) who have limited IBC rights.

In practice, whether you are a financial creditor under Section 5(7) of the IBC decides how much power you have inside an insolvency, so the classification is fought over early. A lender to whom a financial debt, money borrowed for the time value of money, is owed sits on the Committee of Creditors and votes on the resolution plan, whereas operational creditors largely watch from the sidelines. Banks, NBFCs, bondholders, and debenture holders qualify, and so, after the law developed, do real estate allottees. The consequence of misclassifying a claim is significant: a creditor wrongly treated as operational loses its vote and its leverage over the plan and the recoveries. When filing a claim with the resolution professional, counsel must therefore characterise the debt correctly and produce the loan, disbursement, and interest documentation that proves it is financial in nature. Disputes over the financial-versus-operational line, and over the quantum admitted, are routine. Well-advised lenders document the financial character of the debt before the CIRP begins.