In order to facilitate the smooth conduct of business transactions the Government has put in numerous efforts in the form policies and regulations. While the greatest threat posed to the lenders in the modern market operations is the impact of non-performing assets or bad loans. In order to maximize the value assets in a time bound manner, the Government enforced the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the 'IBC').

Upon the admission of the application for insolvency resolution, the insolvency resolution professional appointed thereunder takes care of various related aspects including claim verification, evaluation of the properties of the debtor and implementation of a revival plan before effective liquidation by disposal of assets.

Categorization of lenders

The provisions of IBC include creditors of the below stated categories:

  • Financial Creditor - any person to whom a financial debt (debt along with interest, if any, which is disbursed against the consideration for the time value of money including money borrowed against the payment of interest, amount raised by acceptance under any credit facility, etc.) is owed and includes a person to whom such debt has been legally assigned or transferred to [Section 5(7) of the IBC read with Section 5(8) of the IBC]

  • Operational Creditor - a person to whom an operational debt (a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority) is owed and includes any person to whom such debt has been legally assigned or transferred to [Section 5(20) of the IBC read with Section 5(21) of the IBC]

Request to NCLT

One of the popular banks of the country- the Standard Chartered Bank (hereinafter referred to as the “Bank”) has extended financial support to Ruchi Soya Industries Limited (hereinafter referred to as “Ruchi Soya”) which is undergoing insolvency resolution. The Bank on September 26, 2018, requested the Mumbai branch of National Company Law Tribunal – the insolvency court (also referred to as “NCLT”) allowing it be categorized as financial creditor instead of its current status of being operational creditor. 

The Bank on September 3, 2018 filed an application to recover USD 52.5 million from Ruchi Soya Industries Limited. A tripartite agreement was entered into between the Bank, Ruchi Soya and its subsidiary Avanti Industries. Under the said arrangement, Ruchi Soya received the money from Standard Chartered to supply goods to Avanti, and subsequently, Standard Chartered had to collect money from Avanti along with interest.

With the recognition as financial creditor, the bank expects to stand in better position in terms of repayment of their pending dues. The financial creditors have an opportunity to be a member of the committee of creditors and may directly file an application of debt recovery satisfying the adjudicating authority about the corporate debtors’ default (Section 7 IBC) unlike the operational creditors who are neither the member of committee of creditors nor can file application for debt recovery without the service of demand notice (Section 8 IBC). Also, at the time of asset distribution, a financial creditor can be either a secured or unsecured creditor, an operational creditor always falls in the category of unsecured creditors.