Insolvency and Bankruptcy Code, 2016 (IBC), the terms "financial debt" and "operational debt" refer to two distinct categories of debts

 Under the Insolvency and Bankruptcy Code, 2016 (IBC), the terms "financial debt" and "operational debt" refer to two distinct categories of debts, each having its own scope, procedures for resolution, and rights under the Code.

🔍 Key Differences Between Financial Debt and Operational Debt:

Aspect	Financial Debt	Operational Debt
Definition	Debt arising from financial transactions or financial agreements.	Debt arising from the provision of goods or services or related claims (like statutory dues, employee wages, etc.).
IBC Section	Section 5(8) defines financial debt.	Section 5(21) defines operational debt.
Examples	Loans, bonds, debentures, credit facilities, financial leasing.	Unpaid invoices for goods or services, wages, rent, taxes, etc.
Nature of Debt	Debt arising from borrowed money or credit.	Debt arising from commercial transactions like supply of goods/services.
Purpose of Debt	The debt is typically for funding purposes — for business operations or expansion.	The debt is typically for day-to-day operations like payments for goods, services, or statutory obligations.
Application under IBC	Initiated by financial creditors under Section 7.	Initiated by operational creditors under Section 9.
Documents Required	Loan agreements, bond documents, debenture agreements, financial statements, etc.	Invoices, contracts for supply of goods/services, proof of unpaid wages, statutory dues, etc.
Interest	Financial creditors can claim interest on the debt, and it forms part of the debt.	Interest can be claimed on operational debt if specified in the agreement (e.g., overdue invoices), but it must be tied to operational transactions.
Default Trigger	Triggered when the borrower fails to repay the principal or interest.	Triggered when the payment for goods/services or statutory dues is overdue.
Priority in CIRP	Financial creditors have higher priority in the Committee of Creditors (CoC).	Operational creditors have lower priority than financial creditors in the CoC.
Voting Rights in CoC	Financial creditors have full voting rights in the CoC.	Operational creditors have limited or no voting rights, unless their debt meets a specific threshold (e.g., 10% of total debt).

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✅ Detailed Explanation of Both Types of Debt:

1. Financial Debt:

• Section 5(8) of the IBC defines financial debt as a debt owed to a creditor arising from a financial transaction. It generally includes debt instruments like:

  • Loans (secured or unsecured),

  • Bonds and debentures,

  • Debt securities,

  • Credit facilities provided by banks or financial institutions,

  • Leases, etc.

• Key Features:

  • The debt typically involves the lending of money or credit to a borrower.

  • Financial creditors can initiate the Corporate Insolvency Resolution Process (CIRP) under Section 7 of the IBC if the corporate debtor defaults on repayment.

2. Operational Debt:

• Section 5(21) of the IBC defines operational debt as a debt arising from the provision of goods or services. This includes, but is not limited to:

  • Suppliers who have not been paid for goods provided,

  • Employees seeking unpaid wages,

  • Contractors for unpaid services,

  • Statutory dues like taxes or employee benefits (EPF, gratuity, etc.).

• Key Features:

  • Operational debt is related to day-to-day business activities of the company.

  • Operational creditors can initiate the CIRP under Section 9 of the IBC, provided there is a default in payment or an existing dispute is resolved.

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📌 Key Legal Differences:

1. Who Can File?:

   • Financial Debt: Can be filed by financial creditors such as banks, financial institutions, bondholders, or any person who has provided a loan or credit facility.

   • Operational Debt: Can be filed by suppliers, service providers, employees, and government authorities for unpaid dues.

2. Resolution Process:

   • Financial Creditors usually have greater influence in the Committee of Creditors (CoC) because they are often the largest stakeholders in terms of debt value.

   • Operational Creditors typically have less influence unless they form a significant portion of the debt (e.g., 10% of total debt).

3. Admissibility of Application:

   • The application for financial debt is often clear-cut because it is usually supported by formal documents such as loan agreements or financial instruments.

   • The application for operational debt requires evidence of payment default, such as unpaid invoices, contracts, and statements.

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🧑‍⚖️ Key Case Laws:

• Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2017):
  The Supreme Court clarified the process for resolving disputes over operational debts and held that pre-existing disputes must be settled before an application under Section 9 can be admitted.

• Innoventive Industries Ltd. v. ICICI Bank Ltd. (2018):
  The Supreme Court reaffirmed that a financial creditor's claim (e.g., a loan default) is distinct from an operational debt claim and that IBC is meant to resolve defaults arising from financial transactions.

Under the Insolvency and Bankruptcy Code, 2016 (IBC), interest can indeed be claimed as part of operational debt in certain circumstances

 Under the Insolvency and Bankruptcy Code, 2016 (IBC), interest can indeed be claimed as part of operational debt in certain circumstances, but there are some nuances and conditions to be aware of.

🔍 Understanding Operational Debt:

Operational debt is defined under Section 5(21) of the IBC, and it includes:

• Claims for goods or services,

• Claims related to employment dues,

• Statutory dues (e.g., taxes, duties).

While the principal debt for goods or services is an operational debt, interest (on overdue payments) can also be part of the operational debt if it arises out of the provision of goods/services or an agreement between the parties.

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✅ Claiming Interest as Operational Debt:

1. Interest on Overdue Payments:

   • If the agreement between the creditor and debtor specifies an interest rate on overdue payments (e.g., an invoice that specifies interest for late payment), interest can be claimed as part of the operational debt.

   • The interest would typically be calculated from the date the payment became due until the date of payment or until CIRP admission.

2. Nature of the Debt:

   • The interest must be related to a claim arising from a provision of goods or services. This means that interest tied to services rendered or goods supplied can be included.

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❌ Limitations on Claiming Interest:

However, there are certain conditions and limitations:

1. Interest on Financial Debt:

   • Interest on a financial debt (like a loan) is not part of operational debt, as financial debt is a separate category under the IBC.

   • Only interest on operational debt (goods, services, employment) can be considered as part of the operational claim.

2. Pre-Existing Dispute:

   • If there is a dispute regarding the principal debt or the agreement’s terms, then interest may not be claimed under IBC, especially under Section 9 for operational creditors. If the default or debt is disputed, the operational creditor must establish the clear debt due before claiming interest.

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🧑‍⚖️ Judicial Precedents:

• M/s. Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2017):
  The Supreme Court clarified that if the debt is disputed, the claim (including interest) cannot proceed under IBC.

• Innoventive Industries Ltd. v. ICICI Bank Ltd. (2018):
  While this case primarily deals with the default for financial creditors, the Court’s discussion underscores that interest on financial debts is distinct from operational debts under IBC.

• Dena Bank v. C. Shivakumar Reddy (2018):
  This case highlighted that interest on operational debt is allowed if it’s part of the agreement for goods/services supplied.

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🔑 Key Points:

• Interest on operational debts is permissible but only if it arises from goods/services or is stipulated in the agreement.

• Interest on financial debts (e.g., loans) is outside the scope of operational debt.

• Ensure that the interest claim is linked directly to the underlying operational debt (e.g., an overdue invoice or service payment).

The "date of default" is a crucial concept under the Insolvency and Bankruptcy Code, 2016 (IBC)

 The "date of default" is a crucial concept under the Insolvency and Bankruptcy Code, 2016 (IBC) because it determines whether an insolvency application is admissible and within the limitation period.

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🔍 What is the Date of Default?

The “date of default” is the date on which the corporate debtor fails to pay the debt when it becomes due and payable, and continues to remain unpaid.

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🏛️ Statutory Relevance:

1. Section 7 (Financial Creditors) and

2. Section 9 (Operational Creditors)

Both require that a default must have occurred before an application for Corporate Insolvency Resolution Process (CIRP) can be admitted.

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✅ Why Is the Date of Default Important?

Reason	Explanation
1. Trigger for initiating CIRP	No application under Section 7 or 9 can be admitted without an established default.
2. Starts limitation period	Under the Limitation Act, 1963, a 3-year limitation applies from the date of default.
3. Determines acknowledgment	If there’s a part payment or acknowledgment before expiry of 3 years, the limitation restarts.
4. Affects admission by NCLT	If the application is filed after 3 years from default (without extension), it is time-barred.
5. Impacts computation of interest, damages	Financial implications depend on when the default occurred.

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🔑 Judicial Support:

• B.K. Educational Services v. Parag Gupta (SC, 2018):

  Limitation period of 3 years under the Limitation Act applies from the date of default, not from any other point like the date of last payment.

• Gaurav Hargovindbhai Dave v. Asset Reconstruction Co. (SC, 2019):

  Application beyond 3 years from default date is not maintainable, unless limitation is extended by acknowledgment or part-payment.

• Sesh Nath Singh v. Baidyabati Sheoraphuli Cooperative Bank (SC, 2021):

  Courts can consider exclusion or condonation of delay based on facts like incorrect forum or fraud.

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📘 Supporting Evidence to Prove Date of Default:

• Loan agreements / invoices

• Demand notice (Section 8)

• Bank statements

• Balance sheets (acknowledgment of debt)

• CIBIL/default reports

• Correspondence showing non-payment

key NCLAT (National Company Law Appellate Tribunal) judicial precedents

 

key NCLAT (National Company Law Appellate Tribunal) judicial precedents that have shaped the interpretation and application of the Insolvency and Bankruptcy Code, 2016 (IBC):

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🔹 1. Innoventive Industries Ltd. v. ICICI Bank Ltd.

Citation: Company Appeal (AT) (Insolvency) No. 1 & 2 of 2017
Principle:

• Affirmed that IBC overrides other laws (non obstante clause).

• Emphasized the importance of default and not just the existence of a debt.

Later affirmed by the Supreme Court.

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🔹 2. Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd.

Citation: Company Appeal (AT) (Insolvency) No. 228 of 2017
Principle:

• Clarified that if there is a pre-existing dispute, the operational creditor's application under Section 9 must be rejected.

This NCLAT judgment was later appealed and upheld by the Supreme Court in its landmark judgment (2017) 1 SCC 353.

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🔹 3. M/s. Shailesh Sangani v. Joel Cardoso

Citation: Company Appeal (AT) (Insolvency) No. 616 of 2018
Principle:

• A proprietorship firm is not a separate legal person under IBC.

• A proprietor can file an IBC petition in his own name representing the firm.

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🔹 4. Sree Metaliks Ltd. v. Union of India

Citation: Company Appeal (AT) (Insolvency) No. 169 of 2017
Principle:

• Emphasized natural justice – the corporate debtor must be given a reasonable opportunity to be heard before admission.

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🔹 5. Asset Reconstruction Company (India) Ltd. v. Shivam Water Treaters Pvt. Ltd.

Citation: Company Appeal (AT) (Insolvency) No. 74 of 2017
Principle:

• Reiterated that a Section 7 application does not require notice to the debtor prior to admission.

• Once default is established, the Adjudicating Authority must admit the application.

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🔹 6. Rajendrakumar Kundanmal Jain v. Vijal A. Jain

Citation: Company Appeal (AT) (Insolvency) No. 1327 of 2019
Principle:

• A personal guarantor can be proceeded against under the IBC independently of the corporate debtor.

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🔹 7. Kolkata Municipal Corporation v. Union of India

Principle:

• Statutory dues (municipal taxes, property tax) are operational debts under IBC.

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🔹 8. Anil Kumar Jain v. Vardhman Roller Flour Mills Pvt. Ltd.

Principle:

• Acknowledgment in balance sheet is valid for extending limitation under Section 18 of the Limitation Act.

under the Insolvency and Bankruptcy Code, 2016 (IBC), a proprietorship firm is not considered a “person” in its own right

 under the Insolvency and Bankruptcy Code, 2016 (IBC), a proprietorship firm is not considered a “person” in its own right. However, this does not mean that a proprietorship business cannot invoke the IBC. Here's a clearer legal explanation:

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📘 Legal Definition of “Person” under IBC:

Section 3(23) of the IBC defines “person” to include:

• An individual,

• A Hindu Undivided Family (HUF),

• A company,

• A trust,

• A partnership firm,

• A limited liability partnership (LLP),

• Any other entity established under a statute.

❌ Notably, it does not mention "proprietorship firm" — because a proprietorship is not a separate legal entity.

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✅ Then How Can a Proprietorship File under IBC?

A proprietorship firm operates in the name of its proprietor. Therefore:

• The proprietor, as an individual, is a "person" under IBC.

• He/she can initiate proceedings (such as under Section 9 for operational creditors) in their personal capacity, trading as the firm.

✔ Correct Style of Filing:

“Mr. X, sole proprietor of M/s ABC Enterprises”

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🧑‍⚖️ Judicial Precedent:

• M/s. Shailesh Sangani v. Joel Cardoso (NCLAT, 2019):

  The NCLAT held that proprietorship firms cannot file independently, but the individual proprietor can file in his/her own name on behalf of the proprietorship.

• Pawan Dubey v. J.B.K. Developers (NCLT):

  Clarified that if a proprietorship files in its own name without disclosing the proprietor, it is not maintainable.

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⚠ Implication:

Proprietorship Firm	✅ Cannot sue or be sued as a person under IBC
Proprietor (Individual)	✅ Can initiate proceedings under IBC, representing the firm

a proprietorship firm cannot place any application under Section 9 of IBC 2016

 The statement “a proprietorship firm cannot place any application under Section 9 of IBC 2016” is not entirely correct — but it needs clarification.

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✅ Legal Position:

A proprietorship firm is not a separate legal entity under Indian law. It is not distinct from its proprietor. Hence, the proprietor himself/herself must initiate proceedings in their own name, representing the proprietorship firm.

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🔍 Case Law Support:

• M/s. Shailesh Sangani v. Joel Cardoso (NCLAT, 2019):

  A sole proprietorship firm can file an application under Section 9, provided the application is filed by the proprietor in his own name, showing proof of the existence of the firm and that the debt arose in the course of the firm's business.

• Uttam Galva Steels Ltd. v. DF Deutsche Forfait AG & Anr.:

  NCLAT held that an operational creditor can be any person, including an individual carrying on business as a proprietorship.

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🧾 Requirements for a Proprietorship Firm to File Under Section 9:

1. The application should be filed in the name of the sole proprietor.

2. It must clearly state that the claim arises from the business carried on under the proprietorship.

3. Attach supporting documents to prove:

   • Existence of the firm (GST registration, trade license, etc.)

   • That the debt relates to the proprietorship’s business.

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⚠️ What Is Not Allowed:

A proprietorship cannot file in the name of the firm as if it were a company or LLP. That would be legally defective.

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✅ Correct Way:

If “XYZ Traders” is a proprietorship of Mr. A, the petition under Section 9 must be filed as:

"Mr. A, sole proprietor of M/s XYZ Traders"

Operational Creditor under Insolvency and Bankruptcy Code 2016

 Under the Insolvency and Bankruptcy Code, 2016 (IBC), an Operational Creditor is defined in Section 5(20) as:

“a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.”

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✅ Breakdown of the Definition:

An Operational Creditor is:

1. A person (natural or legal):

   • Includes individuals, companies, firms, LLPs, government entities, etc.

2. Owed an Operational Debt:

   • The creditor must be owed a debt arising from:

     • Provision of goods or services,

     • Employment dues, or

     • Statutory dues (e.g., tax liabilities).

3. Includes assignees or transferees:

   • A third party who has taken over the operational debt (e.g., via assignment) can also qualify.

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📂 Examples of Operational Creditors:

Creditor	Nature of Debt
Vendor/supplier	Unpaid invoice for goods/services
Employee	Unpaid salary or dues
Contractor	Unpaid for services rendered
Government	Unpaid taxes, GST, EPF dues
Utility provider	Outstanding electricity, water, or internet bills

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📌 Rights under IBC:

• Can file an application under Section 9 for initiation of Corporate Insolvency Resolution Process (CIRP).

• Must send a demand notice (Form 3 or 4) and wait 10 days for payment or response.

• Can participate in CIRP, but no voting rights in the Committee of Creditors (CoC) unless certain thresholds are met (e.g., 10% of total debt).

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🔍 Important Distinctions:

Operational Creditor	Financial Creditor
Debt from goods/services or statutory dues	Debt from loans or financial contracts
Files under Section 9	Files under Section 7
Limited role in CoC	Full voting rights in CoC
Need to issue demand notice	No notice required