Mr.

X does cannot be part of the CoC as he is an Operational Creditor

and only the Bank can be part of the CoC as per Section 21 of the I & B
Code.

It is imperative to first understand the definitions of 'Financial Creditor' and 'Operational

Creditor' under the IBC. A financial creditor is defined under Section 5(7) of the IBC to mean
"A person to whom a financial debt is owed and includes a person to whom such debt has
been legally assigned or transferred".
In order to ascertain whether a person is a financial creditor, the debt owed to such a person must
fall within the ambit a 'Financial Debt' as under Section 5(8) of the IBC.
An operational creditor is defined under Section 5(20) of the IBC to mean
"Any person to whom an operational debt is owed and includes any person to whom such
debt has been legally assigned or transferred".
In order to ascertain whether a person would fall within the definition of an operational creditor,
the debt owed to such a person must fall within the definition of an operational debt as defined
under Section 5(21) of the IBC.
Distinction between a financial creditor and operational creditor has been drawn by the
Bankruptcy Law Reforms Committee in para 5.2.1 of its final report1. It states:
"Here, the Code differentiates between financial creditors and operational creditors.
Financial creditors are those whose relationship with the entity is a pure financial
contract, such as a loan or debt security. Operational creditors are those whose liabilities
from the entity comes from a transaction on operations.
The Hon'ble Tribunal in the case of Col. Vinod Awasthy v. AMR Infrastructure Limited,2 held
that the Petitioner had neither supplied goods nor helped in the sale to acquire the status of an
'Operational Creditor'.
If there are no distinction between an Operational Creditor and a Financial Creditor then:
Firstly, it virtually rewrites the provisions of the Code by excluding the applicability of
Section 53 from resolution process carried out under Chapter II of the Code, contrary to
the plain and unambiguous language of Section 30(2) (b).
Secondly, it fails to recognize the legislative intent in creating a distinction between two
classes of creditors, viz. Financial Creditors and Operational Creditors and instead,

1 https://finmin.nic.in/reports/BLRCReportVol1_04112015.pdf
2 Col. Vinod Awasthy v. AMR Infrastructure Ltd. (C.P. No. (IB)10(PB)/2017)
 virtually erases the said distinction, once again over-stepping the limits of its jurisdiction
and wrongly exercising law-making powers.
Thirdly, it relies on conjectures and extraneous considerations for bolstering its position.
There is no factual basis for observing that Operational Creditors will “refuse to supply
goods or render services on credit” or “ask for advance payment for such supply of goods
or to render services” if their dues are not given priority.
A landmark decision was delivered by the Supreme Court of India in Swiss
Ribbons3upholding the constitutional validity of various IBC provisions including,
Section 53. It was also expressly held that the classification between Financial and
Operational Creditors is neither discriminatory, nor arbitrary, nor violative of Article 14
of the Constitution of India, and that there is obviously an intelligible differentia between
the two classes of creditors which has a direct relation to the objects sought to be
achieved by the Code. While upholding the validity of Section 53.
Thus in the instant case, Mr. X is an Operational Creditor and the members of the CoC
have to be creditor both with the capability to assess viability, as well as be willing to
modify terms of existing liabilities in negotiations. With this reasoning, operational
creditors were intentionally left out of the CoC under the presumption that such creditors
would neither be able to decide on matters regarding the insolvency of the entity, nor
would they be willing to take the risk of postponing payments for better future prospects
for the entity.4

3
Swiss Ribbons Pvt. Ltd. v. Union of India, Writ Petition (Civil) No. 99 of
2018, vide Judgment dated 25.01.2019.
4
The Bankruptcy Law Review Committee ("BLRC") released a report ("Report") in November
2015