TaxTMI 
TaxTMI 
2018 (5) TMI 79
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....ial creditor and an operational creditor in respect of a corporate debtor which does not have a rational and intelligible basis. The differentiation between the two categories of creditors being unintelligible and irrational, the provisions of Sections 7, 8 and 9 of the Code of 2016 should be struck down. He has submitted that, undue preference has been given to a financial creditor. A financial creditor has a right to be in the Committee of Creditors (COC) of a corporate debtor in an insolvency proceeding. An operational creditor, although such creditor may have a claim far in excess than that of the financial creditor, will have no say in the Committee of Creditors. In a given situation, a corporate debtor may have only one financial creditor. Such financial creditor will constitute COC, without any participation from any other category of creditors of a corporate debtor including that of an operational creditor, although such operational creditor in a given case may have a claim in excess of the financial creditor and the number of operational creditors may exceed the number of financial creditors. Such a distinction between two categories of creditors in respect of the same fin....
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....itted that, the distinction sought to be introduced by the Code of 2016 between a financial creditor and an operational one is without any basis. The claim of the operational creditor and its money value would, in a given case, be of the same quality and value than that of the financial creditor. The financial creditor should also be visited with the same rigours as visited in case of an operational creditor. Therefore, the difference introduced by the Code of 2016 is not on an intelligible criterion. Drastic consequences of the Code of 2016 aggravate the unequalness amongst the creditors. He has referred to 2017 Volume 203 Company Cases page 442 ( Sree Metaliks Ltd. & Anr. v. Union of India & Anr.), 2017 Supreme Court Cases Online (SC) page 1025 (M/S. Innoventive Industries Ltd. v. ICICI Bank & Anr.), 2017 Supreme Court Cases Online (SC) page 1154 (Mobilox Innovations Private Limited v. Kirusa Software Private Limited) in support of his contentions. Learned Senior Advocate for the petitioners has highlighted the proceedings under the Code of 2016. He has submitted that, the post admission stage of an insolvency petition commences upon the insolvency application being admitted b....
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....itors. He has submitted that, the committee in such report had found that, there was a distinction in the nature of a debt of an operational creditor with that of the financial creditor. Experience has shown that, claim of a financial creditor is more or less uncontested while a claim of an operational creditor may have various angles which may require further adjudication. A claim of an operational creditor can be disputed. He has referred to Innoventive Industries Limited (supra) and has submitted that, the Supreme Court had considered the Code of 2016 and did not find anything wrong with the distinction between a financial and an operational creditor. He has referred to the various provisions of the Code of 2016 and has submitted that, the Code of 2016 requires the adjudicating authority to look into a valid dispute raised. Innoventive Industries Limited (supra) has recognized that, a valid dispute is to be looked at by the adjudicating authority in the manner as noted therein. So far as participation in COC is concerned, according to the learned Advocate for the second respondent, the Code of 2016 recognizes the right of an operational creditor to participate in a meeting of....
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....ency issue even prior to a petition for insolvency being presented against it before the NCLT. In the event of an insolvency petition being presented against the corporate debtor under Sections 7 or 9 of the Code of 2016, as the situation may require, the adjudicating authority has to admit or reject such application within 14 days from the date of presentation. Neither of the two sections excludes the applications on principles of natural justice. Principles of natural justice can be read into a statue unless expressly excluded. On such principle, it cannot be contended that, Sections 7 and 8 obviates the requirement of adherence to the principles of natural justice. He has also relied upon Sree Metaliks Limited & Anr. (supra) in support of his contentions. Learned Advocate for the second respondent has submitted that, unlike the previous statutes, the "divine right" of promoters or shareholders of a company to control and manage a company are no longer held at a high pedestal. Such right is recognized till such time the legal entity is in a position to discharge its liability. Once an element of insolvency creeps into the functions of the company, the right of the shareholders to....
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....nsequently, he has submitted that, the petitioners are not entitled to any relief. The parties have referred to the following provisions of the Code of 2016 for consideration:- "3. Definitions.- In this code, unless the context otherwise requires, - (1)................................................................................. (2)................................................................................ (3)................................................................................ (4)................................................................................ (5)................................................................................ (6) "claim" means - (a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured; (b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured; (7)..................
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.... as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed; (e) receivables sold or discounted other than any receivables sold on nonrecourse basis; (f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing; (g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account; (h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution; (i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause; (9)........................................................................ (10)...................................................................... (11).....................
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....ecorded with the information utility or such other record or evidence of default as may be specified; ( b) the name of the resolution professional proposed to act as an interim resolution professional; and (c) any other information as may be specified by the Board. (4) The Adjudicating Authority shall, within fourteen days of the receipt of the application under subsection (2), ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor under sub-section (3). (5) Where the Adjudicating Authority is satisfied that- (a) a default has occurred and the application under sub-section (2) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application; or (b) default has not occurred or the application under sub-section (2) is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may, by order, reject such application: Provided that the Adjudicating Authority shall, before rejecting the application under cla....
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....e an application before the Adjudicating Authority for initiating a corporate insolvency resolution process. (2) The application under sub-section (1) shall be filed in such form and manner and accompanied with such fee as may be prescribed. (3) The operational creditor shall, along with the application furnish - (a) a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor; (b) an affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt; (c) a copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor; and (d) such other information as may be specified. (4) An operational creditor initiating a corporate insolvency resolution process under this section, may propose a resolution professional to act as an interim resolution professional. (5) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section ....
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.... a company was classified broadly under three categories, namely, secured creditor, unsecured creditor and statutory creditor. The Code of 2016 segregates creditors of a company into two broad categories of financial and operational creditor. In addition to the three classifications of creditors existing prior to the Code of 2016, it now seeks to introduce financial and operational creditors. The definition of financial creditor appears in Section 5(7) which is to be read along with Section 5(8) and Section 3(10) of the Code of 2016. Essentially a financial creditor means a creditor whose claim arises out of a transaction in liquidity entered into by such creditor with the company. A financial creditor can be either a secured creditor or an unsecured creditor. An operational creditor on the other hand is a creditor whose claim arises out of a normal business transaction that such creditor may have had with the legal entity. It would include money receivable by an employee or a worker of the company as wages or salary. It would also include a claim of a statutory authority on account of money receivable pursuant to an imposition by a statute. The classification of a creditor of a....
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....s to say, the financial creditor takes precedence over the operational creditor. Whether the treatment of a financial creditor on pedestal higher than an operational creditor and bestowing a higher or better right, so to speak, to a financial creditor is just and proper or whether the same offends any provisions of the Constitution of India requires consideration. The insolvency process prior to the coming into effect of the Code of 2016 was found to be inadequate to deal with the issues of insolvency of both legal entities and that of natural persons. The existing framework for insolvency and bankruptcy resolution was found to be ineffective and causing undue delay. Few committees and commissions had made recommendations for consolidating the insolvency and bankruptcy laws. The Bankruptcy Law Reforms Committee recommended the Insolvency and Bankruptcy Code. The issue of composition of the committee of creditor for insolvency resolution of a company was considered by the Bankruptcy Committee chaired by Dr. T.K. Viswanathan. The report explains the reasoning behind the composition of the Committee of creditors by the financial creditor and a preference being given to the financia....