The Insolvency and Bankruptcy Code, 2016 (IBC), introduced in India to address inefficiencies in the previous insolvency processes, provides a comprehensive framework for resolving insolvency and bankruptcy. This article delves into the roles and definitions of Corporate Debtors, Financial Creditors, and Operational Creditors within the IBC, highlighting their distinct rights and responsibilities. It explores the initiation of the Corporate Insolvency Resolution Process (CIRP) by financial creditors under Section 7 and operational creditors under Section 9, detailing the procedural requirements and the role of the National Company Law Tribunal (NCLT). The article further examines the IBC’s waterfall mechanism for distributing liquidation proceeds, which prioritizes insolvency resolution costs, secured creditors, workmen, unsecured financial creditors, government dues, and shareholders. The significance of the Technology Development Board vs. Anil Goel case is discussed, emphasizing the equal treatment of secured creditors under Section 53. The article concludes by underscoring the IBC’s transformative impact on insolvency resolution in India and the evolving jurisprudence that continues to shape its application, ensuring clarity and effectiveness in the insolvency and bankruptcy framework.

Keywords: Insolvency, Creditor, Resolution, liquidation, Company


The primary purpose of enacting the Insolvency and Bankruptcy Code, 2016 (IBC) in India was to establish a comprehensive and time-bound framework for resolving insolvency and bankruptcy cases. The IBC was introduced to address various issues and challenges that were present in the earlier fragmented and time-consuming insolvency resolution processes. Under the Insolvency and Bankruptcy Code, 2016 (IBC), the terms “Corporate Debtor,” “Financial Creditor,” and “Operational Creditor” have specific legal definitions:

  1. Corporate Debtor: A corporate entity, such as a company or limited liability partnership (LLP), against which an insolvency resolution process is initiated. It is the entity that owes a debt to its creditors. In the case of Maitrya Doshi vs. Anand Rathi Global Finance Ltd.[1] the Hon’ble Supreme Court of India held that CIRP may be initiated against two corporate debtors but the same amount cannot be realised from both.
  2. Financial Creditor: A person or entity that has extended financial debt to the corporate debtor, including loans, deferred payment obligations, and other forms of credit. Financial creditors have the right to initiate the insolvency resolution process against the corporate debtor.
  3. Operational Creditor: A person or entity that has provided goods or services to the corporate debtor and holds an operational debt. Operational debts arise out of transactions in the ordinary course of business, such as unpaid invoices, supplier dues, and service bills. Operational creditors can also initiate the insolvency resolution process under certain conditions.

In the context of the IBC, the differentiation between financial creditors and operational creditors is significant because their rights and roles in the insolvency resolution process vary. Financial creditors are generally given a more active role and have a higher priority in the distribution of proceeds from the resolution process compared to operational creditors. This is to ensure a more efficient and fair mechanism for resolving insolvency cases.


Section 7 (Financial Creditor)

Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016, pertains to the initiation of the Corporate Insolvency Resolution Process (CIRP) by financial creditors. This section provides the procedure that a financial creditor needs to follow to trigger the insolvency resolution process against a corporate debtor.

  1. Application by Financial Creditor: A financial creditor, who is owed a debt by a corporate debtor, can file an application before the National Company Law Tribunal (NCLT) to initiate the CIRP against the corporate debtor. The application must be filed in the prescribed format along with supporting documents.
  2. Default: The application should demonstrate that the corporate debtor has committed a default in repayment of the debt. The default amount must meet the minimum threshold as specified in the IBC.
  3. Documents: The application should be accompanied by documents such as records of default, evidence of the debt, and proof that an attempt for resolution has been made, if applicable.
  4. NCLT’s Role: The NCLT examines the application and, if satisfied, admits the application. Upon admission, a moratorium period comes into effect, during which no legal actions can be taken against the corporate debtor and its assets are protected.
  5. Appointment of Interim Resolution Professional: The NCLT appoints an Interim Resolution Professional (IRP) to manage the affairs of the corporate debtor during the moratorium period. The IRP’s role is to assess the financial position of the corporate debtor and invite claims from other creditors.
  6. CIRP Period: The CIRP typically lasts for 180 days, with the possibility of an extension of up to 90 days if required. During this period, a resolution plan is formulated and approved by the creditors.
  7. Resolution Plan: The objective of the CIRP is to come up with a resolution plan that outlines how the corporate debtor’s affairs will be restructured to repay its debts and become a viable business entity again.
  8. Liquidation: If a resolution plan is not approved within the specified timeframe or if the plan fails to achieve the desired outcomes, the corporate debtor may be subjected to liquidation

Section 9 (Operational Creditor)

An OC is defined under section 5(20) of the IBC as any person to whom an operational debt is owed (and includes a legal assignee/transferee).

An “operational debt” is defined in section 5(21) as a claim in respect of the provision/supply of goods or services to the CD including employment or a debt in respect of payment of dues arising under any applicable law and payable to the Central Government, any State Government or any local authority.

An application to initiate a CIRP against a CD may be filed by an OC under section 9 of the IBC. However, before filing the application, the OC must serve a demand notice on the CD under section 8 of the IBC.

Demand Notice (section 8)

Section 8 of the IBC states that a demand notice is either a notice or a copy of an invoice (both in the prescribed form) that should be served by an OC on the CD, demanding payment of unpaid operational debt, prior to the initiation of a CIRP against the CD. The notice must be on Form 3, while the invoice demanding payment must be on Form 4, appended to the Application to AA (Adjudicating authority/NCLT) Rules

Rule 5 of the Application to AA Rules states that the demand notice must be delivered to the CD:

  1. At the registered office of the CD by hand, registered post, or speed post with acknowledgement due, or
  2. By electronic mail service to a wholetime director or designated partner or key managerial personnel, if any, of the CD.

Section 8(2) of the IBC states that the CD shall, within 10 days of receiving the demand notice, bring to the notice of the OC:

  1. If there is existence of any dispute or any pending suit or arbitration process before receiving the notice.
  1. If any evidence that the debt has been settled.
  2. Any evidence cheque or cash issued by CD.

Thereafter, no payment has been received after the expiry of the 10-day period, the OC may file an application before the AA to initiate a CIRP.

Section 9 (The OC may file an application to initiate a CIRP against the CD under section 9 of the IBC.)

After 10 days, the OC files an application under section 9 of the IBC using Form 5 (as per rule 6 of the Application to AA Rules). This is accompanied by the documents and records required by and specified in the Application to AA Rules.

The form is divided in five parts, each providing for the submission of the following particulars:

  1. Part I: Details of the applicant OC—name, identification number, and more.
  1. Part II: Details of the CD—its name, identification number, nominal share capital, and paid-up share capital.
  2. Part III: Details of the proposed IRP—the name, address, email address, and registration number of the proposed IRP.
  3. Part IV: Particulars of the operational debt— the total amount of debt, details of the transactions that resulted in the debt, along with the date(s) on which the debt fell due, the default amount claimed, and the date on which the default occurred.
  4. Part V: Details of the operational debt, documents, and records and evidence of default.

As per section (3) of the IBC, the OC shall, along with the application, furnish:

  1. A copy of the demand notice delivered by the OC to the CD;
  2. An affidavit to the effect that there is no notice given by the CD relating to a dispute in the unpaid operational debt (that is, no notice under section 8(2) of the IBC);
  3. A copy of a certificate from financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the CD, if available;
  4. A copy of any record with an IU confirming that there has been no payment of an unpaid operational debt by the CD, if available;
  5. Any other proof confirming that there has been no payment of the unpaid operational debt by the CD or such other information as may be prescribed

Once the OC has furnished the prescribed information the AA shall, under section 9(5) of the IBC, either: Admit the application or reject the application.


The Insolvency and Bankruptcy Code (IBC) in India follows a waterfall mechanism for the distribution of funds during the insolvency process. This mechanism outlines the priority in which creditors receive payments from the liquidation proceeds of a distressed company. The order of priority is typically as follows:

  1. Insolvency Resolution Process (IRP) Costs: Costs incurred during the insolvency resolution process, including fees of insolvency professionals and other administrative expenses.
  2. Secured Creditors: Creditors with secured claims, such as those holding mortgages or pledges over the company’s assets, are given priority in repayment.
  3. Workmen and Employees: Dues owed to employees and workmen for their services rendered during the liquidation process.
  4. Unsecured Financial Creditors: Creditors who have extended loans without collateral or security fall into this category.
  5. Government Dues: Unpaid dues to government authorities, including taxes and statutory payments.
  6. Remaining Unsecured Creditors: This includes other unsecured creditors who do not fall into the categories mentioned above.
  7. Preference Shareholders: Shareholders who hold preference shares and are entitled to receive a fixed dividend before other shareholders.
  8. Equity Shareholders: Equity shareholders are at the bottom of the priority list and typically receive any remaining funds after satisfying higher-priority claims.

In the case of Technology Development Board vs. Anil Goel[2], the National Company Law Appellate Tribunal (NCLAT) held that – “that when secured creditors have the option between relinquishing their right in favour of the liquidation estate and realising their security interests individually, once they choose to relinquish interest, the repayment will take place strictly as per Section 53 of IBC, which does not recognise any distinction between different classes of ‘secured creditors’”. This case law is of crucial importance as far as interpretation of Section 53 of IBC, 2016 is concerned.

It’s important to note that the actual distribution might vary depending on the specific circumstances of each case and the available assets for distribution. The waterfall mechanism ensures a structured and prioritized approach to distributing the assets of a distressed company among its various creditors and stakeholders.


The IBC, 2016 is a statute which is transforming the way, companies dissolve and clear off their liabilities. The robust framework provided by act for insolvency resolution, liquidation, distribution, etc. are precise and clear, which removes scope of ambiguity. Although, the act is relatively new, the Hon’ble Supreme Court has been explaining the intention of the legislature behind provisions (such as Section 53), thus playing its part in evolving the jurisprudence relating to insolvency and bankruptcy effectively.

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Written by – Anurag Das

[1]Maitrya Doshi vs. Anand Rathi Global Finance Ltd.,2022 SCC OnLine SC 1276.

[2] Technology Development Board vs. Anil Goel, Company Appeal (AT) (Insolvency) No.731 of 2020.

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