Navigating real estate insolvencies

Insolvency law must prioritize homebuyers' interests without dragging them into the complexities of the resolution process

- M S SAHOO & RAGHAV PANDEY

The Insolvency and Bankruptcy Code, 2016 (IBC), much like insolvency law in any jurisdiction, revolves around the debtor-creditor relationship. Simply put, a creditor is someone who has lent money, while a debtor is someone who has borrowed it. When the debtor fails to service its debt, the insolvency process is triggered. What sets the IBC apart is its classification of creditors into two broad types. The first is financial creditors (FCs), such as banks and financial institutions, that have lent money and, in most cases, charge interest on the amounts lent. The second is operational creditors (OCs), who have not lent money per se but are owed money for goods and services supplied on credit.

This classification serves an important purpose: It delineates distinct rights for the two types of creditors. Both have defined economic rights with claims on the debtor's assets, which will be discussed later. The key difference lies in their political rights: FCs get to sit on the Committee of Creditors (CoC), the primary decision-making body during the IBC process, while OCs do not. The rationale for including only FCs on the CoC is twofold. First, as primarily financial institutions, FCs possess the commercial expertise necessary to make informed decisions about the debtor's future. Second, they are in a better position to restructure the debts owed to them. However, the basis of this classification and the rationale for granting differing rights, though upheld by the Supreme Court, remains debatable, a topic for another day.