Financial vs Operational Debt under IBC: Case Studies

This topic opens the applied part of the series. Each note sets out fact situations of the kind asked in judiciary mains papers and answers them in four steps: the issue, the law, its application to the facts and the conclusion. Classification comes first because almost every other question depends on it. Whether a creditor is financial or operational decides the section under which it may apply, whether it sits on the committee of creditors and what a resolution plan must pay it.

Figure 1: The four-step method used in every answer

1. The Law in Brief

• Financial debt, section 5(8). A debt with interest, if any, disbursed against the consideration for the time value of money, including the forms listed in clauses (a) to (i); amounts raised from real estate allottees are deemed to have the commercial effect of borrowing under the Explanation to clause (f)
• Operational debt, section 5(21). A claim in respect of the provision of goods or services, including employment, or a debt for dues under any law payable to the Central Government, a State Government or a local authority.
• Why it matters. A financial creditor applies under section 7 without a demand notice and votes in the committee; an operational creditor must serve a demand notice under section 8, is defeated by a pre-existing dispute and has no vote.

Figure 2: Classifying a creditor

2. Is an Interest-Free Loan a Financial Debt under IBC?

• Issue. Whether an interest-free term loan is a financial debt under section 5(8)
• Law. Section 5(8) speaks of a debt along with interest, if any, which shows that interest is not essential. In Orator Marketing v Samtex Desinz (2021), the Supreme Court held that an interest-free term loan for the working capital of the borrower is a financial debt, because money was disbursed to be repaid after a period and the borrower had the use of it in the meantime.
• Application. A Ltd disbursed money to B Ltd for its business, repayable after one year. The deferral of repayment is itself the time value of money. The absence of interest is irrelevant, and the default exceeds one crore rupees.
• Conclusion. A Ltd is a financial creditor and its application under section 7 is maintainable, subject to the other conditions of admission.

3. Is an Advance Paid for Goods an Operational Debt?

• Issue. Whether a purchaser who paid an advance for goods that were never supplied is an operational creditor.
• Law. Section 5(21) defines operational debt as a claim in respect of the provision of goods or services, without saying who must provide them. In Consolidated Construction Consortium v Hitro Energy Solutions (2022), the Supreme Court held that a debt arising from an advance paid to the corporate debtor for goods or services is an operational debt.
• Application. C Ltd's claim arises from a contract for the supply of machinery and is a claim in respect of the provision of goods. It does not matter that C Ltd was the buyer.
• Conclusion. C Ltd is an operational creditor. If D Ltd shows no plausible pre-existing dispute and the default is at least one crore rupees, the application must be admitted.

4. Are Salary and GST Dues Operational Debts?

• Issue. Whether employment dues and statutory dues are financial or operational debts, and the consequences.
• Law. Section 5(21) expressly includes claims in respect of employment and dues under any law payable to a government within operational debt. Only financial creditors constitute the committee under section 21(2)
• Application. The officer's claim arises from employment, and delay in payment does not convert it into a disbursal against the time value of money. The GST dues arise under a statute and are payable to the State.
• Conclusion. Both are operational creditors. The officer may apply under section 9 after serving a demand notice, since his default exceeds one crore rupees. The State may file its claim but has no seat or vote in the committee. After 2026, its statutory charge also does not make it a secured creditor (Topic 43)

Figure 3: How common claims are classified

5. Is a Third-Party Mortgagee a Financial Creditor?

• Issue. Whether a lender secured only by a mortgage given by a third party is a financial creditor of the mortgagor.
• Law. In Anuj Jain v Axis Bank (2020), the Supreme Court held that a person whose only claim against the corporate debtor is a security interest over its property, given for another's debt, is a secured creditor but not a financial creditor of that debtor, because no money was disbursed to it and it owes no debt to the lender.
• Application. H Ltd received no disbursal, did not borrow and did not guarantee the loan. F Bank's rights against H Ltd are confined to the mortgaged land.
• Conclusion. F Bank is not a financial creditor of H Ltd and cannot apply under section 7 against it. It may enforce its mortgage or, if H Ltd enters a CIRP on another application, claim as a secured creditor. The answer would differ if H Ltd had executed a guarantee, which is a financial debt under section 5(8)(i)

6. Frequently Asked Questions

Is a corporate guarantee a financial debt?

Yes. Section 5(8)(i) includes the amount of any liability in respect of a guarantee, so the beneficiary is a financial creditor of the corporate guarantor.

Can an operational creditor become a financial creditor by charging interest on late payment?

No. Interest for delayed payment of an invoice does not change the nature of the underlying claim, which remains a claim for goods or services.

How should an answer to a classification question end?

With the consequence: the section under which the creditor may apply, whether a demand notice is needed, and whether it votes in the committee of creditors.

7. Related Topics

• Topic 7: Financial Debt and Financial Creditor. Section 5(8) in detail.
• Topic 82: Financial vs Operational Creditor. The two classes compared.
• Topic 98: Section 7 IBC Application. Debt, default and admission.