Why Financial Creditors and Operational Creditors Are Not Treated Equally Under the IBC: The Swiss Ribbons Verdict

A borrower pushed into insolvency often arrives with one sharp grievance: why does the bank that lent the money sit on the Committee of Creditors and decide the company's fate, while the supplier who delivered goods on 60-day credit is left watching from outside the room? That inequality is written into the Insolvency and Bankruptcy Code, 2016, and on 25 January 2019 a two-judge Bench of the Supreme Court of India held, in Swiss Ribbons Pvt Ltd v. Union of India (AIR 2019 SC 739; (2019) 4 SCC 17), that it is entirely constitutional.

That judgement, authored by R.F. Nariman J for a Bench that also comprised Vineet Saran J, remains the single most important defence of the IBC's architecture seven years after the Code received assent on 28 May 2016. For any borrower, promoter or operational creditor trying to understand where they stand when a company enters the corporate insolvency resolution process (CIRP), Swiss Ribbons is the starting point. This playbook sets out the statutory position, the procedure, the defences a borrower can still raise, and what the Court actually decided.

The Statutory Position

The IBC, 2016 draws a deliberate line between two classes of creditor, and that line decides who controls the resolution. A financial creditor is one to whom a financial debt — a loan disbursed against the time value of money — is owed. An operational creditor is owed an operational debt, typically for goods, services, employment or statutory dues. The distinction is not cosmetic: only financial creditors sit on the Committee of Creditors (CoC) and vote on the resolution plan.

Under Section 7, a financial creditor can file to trigger CIRP once the company commits a default of at least Rs 1 crore. That threshold was raised from the original Rs 1 lakh by the Ministry of Corporate Affairs notification dated 24 March 2020, a change meant to keep smaller firms out of the Code during pandemic stress. Under Section 9, an operational creditor can apply, but only after first serving a demand notice under Section 8 and waiting out the statutory period; the default threshold is the same Rs 1 crore after the 24 March 2020 notification.

The constitutional attack in Swiss Ribbons was built on Article 14 of the Constitution, the guarantee of equality before the law. Petitioners argued that treating financial and operational creditors differently — letting one class vote and shutting the other out — was arbitrary discrimination. The Supreme Court rejected that argument on 25 January 2019, holding that the classification satisfies the "intelligible differentia" test: there is a real, identifiable difference between the two groups, and that difference has a rational nexus to the object of the Code.

The Court's reasoning rested on a factual distinction it found self-evident. Financial creditors, it held, typically lend larger sums under specified repayment schedules and have both the information and the capacity to assess a corporate debtor's viability and restructure debt before default. Operational creditors, by contrast, are usually numerous, are owed smaller transaction-based amounts, and are not equipped to run a going-concern assessment of the kind the resolution process demands. On that basis the two classes are not similarly situated, and Article 14 does not require them to be treated alike.

Alongside the creditor distinction, the Court in the same 25 January 2019 judgement upheld the 90% voting threshold that Section 12A prescribes for withdrawing an admitted insolvency application. The logic is that once an application is admitted, CIRP ceases to be a private dispute between applicant and debtor and becomes a collective proceeding in rem that affects every stakeholder; withdrawal therefore cannot be left to the applicant alone and must command near-unanimous creditor consent. A secured loan backed by collateral does not change that collective character once the case is admitted.

Procedure Step by Step

The corporate insolvency resolution process runs through a fixed statutory sequence laid down in Chapter II of the IBC, 2016. A borrower who understands each of these 9 gates knows where a defence can still be mounted.

1. Default crystallises. A payment default of at least Rs 1 crore (the threshold set on 24 March 2020) must exist before any creditor can file.
2. Application is filed. A financial creditor applies under Section 7, an operational creditor under Section 9 after a Section 8 demand notice, or the corporate debtor itself under Section 10.
3. NCLT admits or rejects. For a Section 7 application the National Company Law Tribunal is directed by Section 7(4) to ascertain the default and ordinarily decide within 14 days of receipt. Admission is the moment insolvency becomes real.
4. Moratorium begins. On admission, Section 14 imposes a moratorium freezing suits, recovery actions, SARFAESI enforcement and DRT proceedings against the company for the duration of CIRP.
5. Interim resolution professional takes over. An IRP is appointed, the board is suspended, and a public announcement invites claims.
6. CoC is constituted. The resolution professional verifies claims and forms the Committee of Creditors from the financial creditors — the class Swiss Ribbons confirmed as the decision-makers.
7. Resolution plan is voted. Section 30(4) requires a resolution plan to be approved by not less than 66% of the voting share of the CoC (reduced from the original 75% by the 2018 amendment).
8. Timeline is enforced. Section 12 sets 180 days for CIRP, extendable once by up to 90 days; the 2019 amendment added an overall outer limit of 330 days including litigation time.
9. Outcome. An approved plan binds all stakeholders; failure to approve a plan within the timeline pushes the company into liquidation under Section 33, where assets are distributed under the Section 53 waterfall.

The distribution waterfall in Section 53 is where the financial-versus-operational divide becomes concrete in a borrower's pocket. The order of priority is fixed by statute.

Borrower Defences Available

Swiss Ribbons, decided 25 January 2019, closed the constitutional door, but it did not remove the specific defences the Code itself provides. A borrower or promoter still has at least 5 distinct grounds, each with its own threshold and timeline.

Dispute the debt or the default. For an operational creditor's Section 9 petition, a genuine pre-existing dispute raised before the Section 8 demand notice is a complete bar to admission. The Rs 1 crore threshold set on 24 March 2020 is itself a defence: a default below that figure cannot sustain any application.

Challenge limitation. An application under Section 7 or 9 must be filed within three years of the date of default, applying Article 137 of the Limitation Act, 1963. Oquilia's note on the three-year limitation under Article 137 explains how a time-barred debt, even if genuine, cannot found a petition.

Settle under Section 12A. The most practical exit is withdrawal. After admission, the applicant can seek withdrawal under Section 12A, but only with the approval of 90% of the voting share of the CoC — the very threshold upheld in Swiss Ribbons on 25 January 2019. In practice this means negotiating a one-time settlement that the dominant financial creditors will back, since a single large lender holding more than 10% can block the withdrawal.

Allege malicious or fraudulent initiation. Section 65 allows the tribunal to penalise a creditor who initiates CIRP fraudulently or with a malicious intent for any purpose other than resolution, with a penalty that can run to Rs 1 crore.

Preserve appeal rights. A party aggrieved by an NCLT order has 30 days to appeal to the National Company Law Appellate Tribunal under Section 61, with the NCLAT empowered to condone a delay of up to a further 15 days. A further appeal to the Supreme Court lies under Section 62 within 45 days on a question of law. Missing these windows forfeits the defence regardless of its merits.

A borrower weighing a settlement against the cost of fighting through CIRP can model the comparison with Oquilia's foreclosure calculator, test a restructuring with the debt consolidation calculator, and gauge fresh borrowing capacity against the loan eligibility calculator before approaching the CoC.

Recent Tribunal and High Court Position

Swiss Ribbons, decided 25 January 2019, remains the governing authority and has been followed consistently rather than diluted. The holding on differential treatment of creditors has not been disturbed by any larger Bench since 2019; subsequent decisions have applied its "intelligible differentia" reasoning rather than questioned it.

The second limb of the judgement — the 90% Section 12A threshold for withdrawal — has proved the more contested of the two in the years since 2019. The Court's premise that CIRP becomes an in rem proceeding on admission continues to frame how tribunals treat last-minute settlements: a promoter who reaches terms with the applicant after admission still needs 90% of the CoC to agree, a number the Court in 2019 described as the price of turning a bilateral default into a collective process. Borrowers who assume that paying off the single creditor who filed will end the case misread the judgement, which has governed this question since 25 January 2019.

The same 25 January 2019 Bench also upheld Section 29A of the Code, which bars a defaulting promoter whose account has been classified as a non-performing asset for 12 months or more from submitting a resolution plan to buy back the company. For a borrower that limb matters because it forecloses the route of regaining control cheaply through the back door of CIRP: the Court reasoned that a person who contributed to the default should not be allowed to profit from the resolution. Taken with the 90% withdrawal threshold, Section 29A means the realistic exits after admission in 2019 and since are a creditor-backed resolution plan or an early Section 12A settlement, not a promoter buyback.

For how enforcement under the parallel SARFAESI regime interacts with these principles, Oquilia's analysis of symbolic possession in ITC v. Blue Coast Hotels traces where secured-creditor rights and auction finality sit outside the Code, a statute that has run in parallel since 2016.

The full text of the governing judgement, reported at AIR 2019 SC 739 and (2019) 4 SCC 17, is available on Indian Kanoon; the Insolvency and Bankruptcy Code, 2016 itself is published on India Code.

FAQ

What did Swiss Ribbons v. Union of India actually decide?

Decided on 25 January 2019 (AIR 2019 SC 739), the Supreme Court upheld the overall constitutional validity of the Insolvency and Bankruptcy Code, 2016, including the differential treatment of financial and operational creditors under Article 14 and the 90% voting threshold in Section 12A for withdrawing an admitted application.

Why can financial creditors vote on the CoC when operational creditors cannot?

The Court held on 25 January 2019 that financial creditors typically lend larger sums under specified repayment schedules and can assess a debtor's viability, while operational creditors are numerous and owed smaller transaction-based amounts. That real difference satisfies the "intelligible differentia" test, so excluding operational creditors from the CoC vote does not breach Article 14.

How much of the Committee of Creditors must agree to withdraw an insolvency case?

Section 12A requires the approval of 90% of the voting share of the CoC to withdraw an application admitted under Section 7, 9 or 10. Swiss Ribbons upheld this threshold on 25 January 2019, reasoning that once CIRP becomes a collective proceeding, withdrawal needs near-unanimous creditor consent.

What is the minimum default needed to trigger insolvency against a company?

Since the Ministry of Corporate Affairs notification of 24 March 2020, the default must be at least Rs 1 crore. Before that date the threshold was Rs 1 lakh, so many smaller defaults that would once have been actionable can no longer sustain a petition.

Can a borrower still settle after the insolvency application is admitted?

Yes. A borrower can propose a one-time settlement and seek withdrawal under Section 12A, but it requires 90% of the CoC's voting share to approve. A settlement with only the creditor who filed is not enough once the case is admitted, because Swiss Ribbons (25 January 2019) treats CIRP as an in rem process.

How long does the corporate insolvency resolution process take?

Section 12 sets 180 days, extendable once by up to 90 days. The 2019 amendment added an overall outer limit of 330 days, including time spent in litigation, after which the company ordinarily proceeds to liquidation under Section 33.

What is the order of payment if the company is liquidated?

Section 53 fixes the waterfall: CIRP and liquidation costs first, then secured creditors and workmen dues for the last 24 months, then other employee wages for 12 months, then unsecured financial creditors, then government dues, and finally preference and equity shareholders.