Answer By law4u team
A Financial Creditor under the Insolvency and Bankruptcy Code (IBC), 2016, is an individual or entity to whom a corporate debtor owes a financial debt. This debt arises from a loan or credit facility provided to the debtor, usually with a formal agreement and a set repayment schedule. Financial creditors are typically banks, financial institutions, or other entities that have extended credit, whether in the form of loans, bonds, or other debt instruments.
The role of financial creditors in the Corporate Insolvency Resolution Process (CIRP) is critical, as they hold significant power within the Committee of Creditors (CoC) and influence decisions regarding the restructuring or liquidation of the debtor.
Who is Considered a Financial Creditor?
Definition of Financial Debt
Financial debt refers to any liability that results from borrowing funds or taking credit. It includes debts arising from loans, bonds, debentures, or any other financial instrument with an agreed-upon repayment schedule or interest.
Examples of Financial Debt Include:
- Loans: Any credit extended by banks, financial institutions, or non-banking financial companies (NBFCs).
- Bonds and Debentures: Corporate debt securities issued to raise funds.
- Trade Credit: In cases where credit is extended for the purchase of goods or services with a formal agreement for repayment over time.
- Lease Financing: Financial debts arising from leasing or hire purchase agreements.
- Debt Instruments: Financial products like promissory notes, commercial papers, etc.
Who Qualifies as a Financial Creditor?
- Banks and Financial Institutions: These are the most common financial creditors who provide credit or loans to a corporate debtor.
- Investors in Debt Instruments: Individuals or entities that have invested in bonds, debentures, or other debt instruments issued by the company.
- Lenders (including NBFCs): Non-Banking Financial Companies (NBFCs) or other lenders who have extended credit facilities to the corporate debtor.
- Bondholders: Investors who hold bonds issued by the corporate debtor.
- Holders of Promissory Notes or Other Instruments: Any individual or institution holding debt instruments such as promissory notes, bills of exchange, etc., is a financial creditor.
Rights and Role of Financial Creditors in CIRP
Initiating the Insolvency Process
Application to NCLT:
Financial creditors can initiate the Corporate Insolvency Resolution Process (CIRP) if the debtor defaults on a financial debt of ₹1 crore or more. They file an application with the National Company Law Tribunal (NCLT), requesting the initiation of insolvency proceedings against the debtor company.
Admission of Petition:
If the application is accepted, the NCLT admits the petition, and a moratorium is imposed, halting any further legal action by other creditors or the debtor’s management.
Formation and Functioning of the Committee of Creditors (CoC)
CoC Formation:
Once the CIRP is initiated, a Committee of Creditors (CoC) is formed, consisting of both financial creditors and operational creditors. However, financial creditors have a greater voting power in decision-making (voting rights are weighted by the amount of debt they hold).
Decision Making:
Financial creditors hold significant influence within the CoC. They have the power to vote on critical decisions, such as approving or rejecting the resolution plan. A resolution plan can only be approved if it garners the consent of at least 75% of the financial creditors by value.
Resolution Plan Evaluation:
Financial creditors have a major role in evaluating and approving any resolution plan presented during the insolvency process. They assess the viability of the plan and its ability to recover or restructure the debtor's financial obligations.
Voting Power and Influence
Higher Voting Power:
Financial creditors have higher voting power in the CoC, as their votes are weighted based on the amount of debt they are owed. This allows them to have a significant say in the direction of the insolvency resolution process.
Approval of Resolution Plan:
The approval or rejection of a resolution plan depends on the majority decision of the CoC. If the financial creditors approve the plan, it is submitted to the NCLT for final approval.
Priority in Repayment
Repayment Priority:
In the event of liquidation, financial creditors are given priority over operational creditors in the distribution of proceeds from asset sales. This priority is established by the IBC, ensuring that financial creditors are paid first, after meeting the costs of the liquidation process.
Liquidation Proceeds:
Once the company's assets are liquidated, financial creditors receive their dues as per the order of priority specified in the IBC.
Resolution or Liquidation
Resolution Plan Approval:
If the CoC agrees on a resolution plan, the debtor company can continue its operations under the newly structured terms. Financial creditors will receive payments according to the plan.
Liquidation:
If no resolution plan is agreed upon within the stipulated time (typically 180 days, extendable by 90 days), the company is sent for liquidation. The financial creditors will recover a portion of their debt based on the proceeds from the sale of assets.
Right to Appeal
Appeal to NCLAT:
If financial creditors disagree with the NCLT’s order or any decision made during the insolvency proceedings, they can appeal the decision to the National Company Law Appellate Tribunal (NCLAT).
Example: Role of Financial Creditors in CIRP
Example: XYZ Ltd. (A Technology Firm)
XYZ Ltd., a technology company, defaults on a ₹5 crore loan from a consortium of banks. The banks, as financial creditors, initiate the Corporate Insolvency Resolution Process (CIRP) by filing a petition with the NCLT. Upon admission, a moratorium is imposed, and an Insolvency Professional (IP) is appointed to manage the company's affairs.
CoC Formation:
The Committee of Creditors (CoC) is formed, which includes the banks (as the major financial creditors) and a few operational creditors who are owed smaller amounts. The banks hold 80% of the voting power in the CoC.
Resolution Plan:
Several resolution plans are presented, and the banks (financial creditors) vote on the plans. The majority of the financial creditors approve a resolution plan where XYZ Ltd. will be restructured and its debts repaid over a period of time.
NCLT Approval:
After the CoC approves the plan, it is submitted to NCLT for final approval. Once NCLT approves the plan, XYZ Ltd. continues its operations under the new terms, and the banks receive their payments as per the approved resolution plan.
Liquidation (If No Plan is Approved):
If the resolution plan is not approved and no agreement is reached, the company is liquidated, and the banks, being financial creditors, will receive their share from the proceeds of the liquidation sale, as per the priority defined under the IBC.
Conclusion:
A financial creditor under the Insolvency and Bankruptcy Code (IBC), 2016 is any person or entity to whom a corporate debtor owes a financial debt, such as a loan, credit facility, or investment in debt instruments. Financial creditors have significant power in the Corporate Insolvency Resolution Process (CIRP) and play a crucial role in decision-making through the Committee of Creditors (CoC). They are primarily concerned with recovering their dues, either through a resolution plan or liquidation, and their claims are prioritized over those of operational creditors in the event of liquidation.
