Apartment buyers as financial creditors: pushing the conceptual limits of the Indian insolvency regime

Abstract

A unique feature of the Indian insolvency regime is its classification of debt into “operational” and “financial” debt. In Swiss Ribbons v. Union of India, the Supreme Court of India tenaciously upheld the difference between operational and financial creditors and declared this classification constitutionally valid. Last year, the Insolvency and Bankruptcy Code, 2016 (IBC) was amended to include amounts raised from allottees (persons to whom an apartment or plot in a real estate project has been allotted) within the definition of “financial debt,” thus making allottees financial creditors. Though the amendment was passed to empower allottees in India’s real estate sector, it revived a more general discussion on the characteristics of operational and financial creditors. This paper posits that the amendment was enacted at the cost of stretching the definition of “financial creditor” beyond its conceptual limit and interfering with the IBC’s insolvency resolution mechanism. We use the United States’ and the United Kingdom’s insolvency regimes as a point of reference for ascertaining the role of creditors in insolvency proceedings and whether operationalizing the insolvency regime to solve problems in a particular sector is justified.