Financial Creditor under IBC – Definition, Rights, and Legal Process

The Insolvency and Bankruptcy Code, 2016 (IBC) revolutionized the insolvency regime in India by introducing a time-bound mechanism for resolving corporate financial distress. Among the key stakeholders in this process is the Financial Creditor — a person or institution to whom a financial debt is owed by the corporate debtor.

Who is a Financial Creditor?

As per Section 5(7) and 5(8) of the IBC, a Financial Creditor means any person to whom a financial debt is owed, including an assignee or transferee of such debt. A financial debt refers to money borrowed against payment of interest, encompassing loans, debentures, bonds, and other credit facilities.

Examples of Financial Creditors

Banks and financial institutions lending to companies.
Debenture holders or bond investors.
Homebuyers (as per the 2018 amendment to IBC).
Asset Reconstruction Companies (ARCs) and NBFCs.

Initiating Insolvency Proceedings – Section 7 IBC

A Financial Creditor can initiate the Corporate Insolvency Resolution Process (CIRP) under Section 7 of the IBC when a default occurs. The application is filed before the National Company Law Tribunal (NCLT) along with:

Evidence of default (bank statements, loan agreements, etc.).
Details of debt amount and date of default.
Written consent of the proposed Interim Resolution Professional (IRP).

The NCLT, upon satisfaction, admits the application and declares a moratorium under Section 14, halting all recovery proceedings against the corporate debtor.

Role and Rights of Financial Creditors

Form the Committee of Creditors (CoC), which drives the CIRP and votes on resolution plans.
Right to approve or reject a resolution plan under Section 30(4).
Right to participate in meetings, access information, and challenge resolutions before NCLAT/Supreme Court.
Priority in repayment during liquidation as per Section 53 of IBC.

Key Judicial Precedents

Innoventive Industries Ltd. v. ICICI Bank (2018) 1 SCC 407 – Established that once default is proved, NCLT must admit the Section 7 application.
Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4 SCC 17 – Upheld the constitutional validity of IBC and recognized the primacy of Financial Creditors in CIRP.
Phoenix ARC Pvt. Ltd. v. Spade Financial Services Ltd. (2021) 3 SCC 475 – Clarified that only genuine lending transactions qualify as financial debts.

Conclusion

The IBC empowers Financial Creditors with significant rights to initiate insolvency and recover dues in a structured and time-bound process. Their decisions play a vital role in the revival or liquidation of distressed companies. Proper documentation, timely action, and legal compliance are essential for effective enforcement of creditor rights under the IBC.

Disclaimer: This article is for informational purposes only and does not constitute legal advice. For specific guidance, please consult a qualified insolvency professional or advocate.

Tags: Financial Creditor, IBC, NCLT, Insolvency, Corporate Debtor, Section 7, CIRP