CLASSIFICATION BETWEEN FINANCIAL CREDITORS AND OPERATIONAL CREDITORS.

  Classification between financial creditors and operational creditors.

 Here, the petitioner argued that there is no intelligible differentia between financial creditors and operational creditors. It was said that since IBC gives distinction between the financial creditors and operational creditors, it is ultimately leading to violation of article 14 of Indian Constitution.

Article 14 of Indian Constitution says that “right to equality is a fundamental right, and equal peoples should be treated equally, unequal should be treated unequally. And if differentiation is made among the class then there should be intelligible differentia and reasonable nexus between the two then it will not be considered as voilative of article 14”.

After many judgments and cases in EP Royappa v. state of tamil naidu [1]case; it has been held by this Court that the basic principle which informs both Articles 14 and 16 are equality and inhibition against discrimination.

After many interpretation and analysis the two dimensions of article 14 of Indian Constitution in its application to legislation are now well recognized now i.e. (1) discrimination, based on an impermissible or invalid classification, and (2) excessive delegation of powers; conferment of unanalyzed and unguided powers on the executive, whether in the form of delegated legislation or by way of conferment of authority to pass administrative orders. If anything is done without guidance, check or control, it will be violative of article 14 of Indian constitution.

So we are here going to discuss the difference between financial creditors and operational creditors.

• Role of financial creditors and operational creditors

By analyzing some key differences between financial creditors and operational creditors we can sum up and say that there is intelligible differentia between the two which has a undeviating relation to the object sought to be attain by the code.

The Supreme Court held that the distinction is "neither discriminatory, nor arbitrary, nor violative of Article 14 of the Constitution of India"[3]

In summary, the SC found sufficient intelligible differentia rationalize the differential treatment accorded to financial and operational creditors and concluded: "it can be seen that unsecured debts are of various kinds, and so long as there is some legitimate interest sought to be protected, having relation to the thing sought to be attain by the statute in question, Article 14 does not get misconducted. For these reasons, the summons to Section 53 of the Code must also fail.

• NO VOTING RIGHTS.

When dealing with the issue of operational creditors not having voting rights in the Committee of Creditors (‘COC’), the SC referred to the Report of the Bankruptcy Law Reforms Committee and the Report of the Insolvency Law Committee and observed that financial creditors, i.e., banks and financial institutions, are best equipped to evaluate the viability and feasibility of the business of the corporate debtor; whereas operational creditors are only involved in the recovery of amounts and are typically unable to assess the viability and feasibility of the business.

•  NOTICE AND HEARING

On the concern of notice and hearing, the SC cite to various provisions of the Code and its judgment in Innoventive Industries Ltd. v. ICICI Bank[4]. The SC observed that a corporate debtor is served with a copy of the application with the resolve authority and has the opportunity to file a reply and be heard. The Code prescribes penalties for furnishing false information and for fraudulent or malicious initiation of proceedings. Further, a financial creditor has to prove ‘default’ as opposed to an operational creditor who has to merely ‘claim’ a right to payment of liability or obligation in respect to the debt which may be due.

• Safeguards for Operational Creditors

The SC further noted that while looking into the viability and feasibility of resolution plans that are approved by the COC, tribunals always examine: (i)- whether or not the operational creditors were given roughly the same treatment as the financial creditors and (ii)- whether plans have been modified such that the rights of the operational creditors are safeguarded. Further, the operational creditors are required to be paid liquidation value at the minimum. The amended Regulation 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 further intensify the rights of operational creditors by furnishing priority in payment over financial creditors.

For all the preceding reasons, it was found that operational creditors are not discriminated and are not violative of article 14 of Indian Constitution. The above analyzing is not against article 14. They are discriminated on the grounds of intelligible differentia and had a reasonable nexus between them.