Difference Between Financial Creditors and Operational Creditors under the Insolvency and Bankruptcy Code (IBC), 2016

1. Introduction

The Insolvency and Bankruptcy Code, 2016 (IBC) revolutionised India’s insolvency regime by consolidating and amending laws related to reorganisation and insolvency resolution of corporate persons, partnership firms, and individuals.
One of the most significant aspects of the Code is the classification of creditors into two categories — Financial Creditors and Operational Creditors.
This distinction determines who can initiate insolvency proceedings, how claims are treated, and what voting rights they hold in the resolution process.

The Difference between Financial and Operational Creditors under IBC is crucial for understanding the implications of insolvency proceedings.

2. Who is a Financial Creditor?

As per Section 5(7) of the IBC, a Financial Creditor is any person to whom a financial debt is owed and includes any person to whom such debt has been legally assigned or transferred.

In simple words, a financial creditor is a lender or financier who has provided funds to the corporate debtor against consideration for the time value of money, such as interest or return.

3. Who is an Operational Creditor?

Under Section 5(20) of the IBC, an Operational Creditor means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.

Operational creditors are those who supply goods or services, or are employees of the corporate debtor, or are government authorities entitled to statutory dues like taxes or duties.

4. Nature of Debt: Financial vs. Operational

• Financial Debt [Section 5(8)] – Any debt disbursed against consideration for the time value of money.
  Example: Loan, debentures, bonds, credit facilities, etc.
• Operational Debt [Section 5(21)] – Any claim in respect of the provision of goods or services, including employment or statutory dues.

The difference lies in the purpose and nature of the transaction — while financial debt is connected with finance and investment, operational debt arises from trade and services.

5. Purpose and Characteristics of Financial Debt

The primary intent of financial debt is capital financing.
It involves transactions that contribute to the financial structure and growth of the corporate entity.

Key features include:

• Disbursement of funds for consideration of the time value of money.
• Structured repayment with or without interest.
• Generally involves banks, NBFCs, or institutional investors.

Also Read- Process of Initiating Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC), 2016

6. Purpose and Characteristics of Operational Debt

Operational debt arises from the day-to-day operational activities of a business.
It does not involve interest or investment but rather the exchange of goods or services.

Examples include:

• Supply of raw materials.
• Service contracts.
• Salary or wages due to employees.
• Tax dues payable to government authorities.

7. Examples of Financial Creditors

• Banks and Financial Institutions.
• Debenture or Bond holders.
• Homebuyers (as per the amendment upheld in Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416).
• NBFCs and Private Lenders.

8. Examples of Operational Creditors

• Vendors or Suppliers.
• Contractors and Service Providers.
• Employees or Workmen (for salary or wages).
• Government Departments (for statutory dues like GST, PF, etc.).

9. Rights of Financial Creditors under IBC

• Initiation of CIRP: They can initiate insolvency proceedings under Section 7 of the IBC.
• Participation in CoC: They form part of the Committee of Creditors (CoC) and have voting rights proportionate to their financial exposure.
• Major Decision-Making Role: Approval of resolution plans and appointment of Resolution Professionals depend on their collective decision.

10. Rights of Operational Creditors under IBC

• Initiation of CIRP: They can initiate insolvency proceedings under Section 9 after serving a demand notice under Section 8.
• Limited Participation: They have no voting rights in CoC, except when their dues exceed a certain threshold or when CoC considers their interest in the plan.
• Right to Receive Payment: They are entitled to at least the liquidation value of their debt under a resolution plan.

11. Priority in Payment under Liquidation (Section 53 of IBC)

In the event of liquidation, the order of priority is as follows:

1. Insolvency Resolution Process Costs.
2. Workmen’s dues and secured creditors.
3. Wages and unpaid dues to employees (other than workmen).
4. Financial Creditors (unsecured).
5. Operational Creditors.
6. Government dues and remaining debts.

Hence, Operational Creditors rank lower than Financial Creditors in the priority list.

12. Role in Corporate Insolvency Resolution Process (CIRP)

Particulars	Financial Creditor	Operational Creditor
Relevant Section	Section 7	Section 9
Nature of Debt	Loan / Financial assistance	Goods / Services / Employment dues
Voting Rights	Yes (in CoC)	Limited / None
Time Value of Money	Present	Absent
Involvement in CIRP	Continuous	Limited

13. Key Judicial Pronouncements

(a) Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17

The Hon’ble Supreme Court of India upheld the constitutional validity of distinguishing between financial and operational creditors, holding that:

“Financial creditors are involved in assessing the viability and feasibility of the resolution plan, while operational creditors are generally concerned only with recovery of their dues.”

(b) Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416

The Supreme Court recognised homebuyers as financial creditors, observing that they finance real estate projects and thus fall within the ambit of Section 5(8)(f).

14. Practical Illustration

Consider a company “ABC Pvt. Ltd.”:

• Bank X lends ₹10 crore – Financial Creditor.
• Supplier Y delivers raw material worth ₹50 lakh – Operational Creditor.

In insolvency proceedings, Bank X will be part of the CoC and influence the resolution process, while Supplier Y will have limited rights and will receive dues as per the approved plan or liquidation value.

15. Comparative Table

Basis	Financial Creditor	Operational Creditor
Section	5(7) & 5(8)	5(20) & 5(21)
Example	Bank, NBFC, Homebuyer	Supplier, Employee, Government
Right to File	Section 7	Section 9
CoC Membership	Yes	No (except limited cases)
Voting Power	Proportionate to claim	Limited or Nil
Recovery Priority	Higher	Lower
Nature of Claim	Financial in nature	Operational in nature

16. Conclusion

The distinction between financial and operational creditors under IBC serves a well-defined purpose — ensuring a structured, fair, and efficient insolvency process.
While financial creditors play a pivotal role in decision-making, operational creditors are protected through guaranteed minimum payments and transparency in the resolution plan.
The jurisprudence laid down by the Supreme Court continues to balance the interests of both, thereby upholding the Code’s spirit of revival over recovery.

Also Read-How to Recover Possession under Indian Tenancy Laws- Procedure for Landlord

17. FAQs

Q1. Can an Operational Creditor be part of the Committee of Creditors (CoC)?
→ No, operational creditors are generally not members of the CoC unless the CoC decides to include them for specific matters.

Q2. Why are Financial Creditors given higher importance under the IBC?
→ Because they have the financial expertise to evaluate resolution plans and ensure the revival of the company rather than mere recovery.

Q3. Can an employee file a case as an Operational Creditor?
→ Yes, employees and workmen whose salaries or wages are unpaid fall under the category of operational creditors.

Q4. Who gets paid first during liquidation?
→ Financial creditors and workmen have priority over operational creditors as per Section 53 of the IBC.