When insolvency begins, the most decisive factor is not just the quantum of debt but the nature of the creditor. Whether a creditor is classified as secured or operational directly determines recovery, control, and influence in the resolution process. This distinction is often underestimated at the lending or contracting stage. Practically, what we have seen is that businesses only realise its importance when they find themselves in a distressed situation with limited recovery options. The IBC has not only codified this distinction but has also been shaped extensively through judicial interpretation, which has clarified how secured and operational creditors are to be treated in practice.
Judicial Recognition of Secured Creditors’ Dominance
The position of secured creditors has been firmly reinforced through judicial pronouncements, particularly by the Supreme Court. In Committee of Creditors of Essar Steel India Ltd vs Satish Kumar Gupta, the Supreme Court examined the role and authority of financial creditors within the insolvency framework. The Court upheld the primacy of the Committee of Creditors and recognised that financial creditors, most of whom are secured, are best equipped to assess the feasibility and viability of resolution plans. The Court clarified that the commercial wisdom of the CoC cannot be interfered with except on limited grounds. It further held that differential treatment between classes of creditors is permissible and inherent to the scheme of the IBC, and this judgment has fundamentally shifted the power balance in insolvency proceedings. Practically, what we have seen is that secured financial creditors exercise decisive control over the resolution process, including approval or rejection of plans, often leaving operational creditors with limited negotiating leverage.
Operational Creditors and the Limits of Protection
While operational creditors are recognised under the IBC, their rights are comparatively restricted. This position has been clarified through multiple judicial decisions.
In Swiss Ribbons Pvt Ltd vs Union of India, the Supreme Court upheld the constitutional validity of the IBC and specifically addressed the distinction between financial and operational creditors. The Court held that financial creditors are involved in assessing the viability of the debtor and restructuring the debt, whereas operational creditors are typically concerned with recovering dues arising from the supply of goods or services.
The Court justified the differential treatment based on intelligible differentia and rational nexus with the objectives of the Code. In this, what we have seen is that this judgment has closed the door on challenges seeking equal treatment between creditor classes. Operational creditors must now operate within a framework where their recovery is subject to decisions taken by financial creditors.
Another important ruling is Standard Chartered Bank vs Satish Kumar Gupta, where the NCLAT reiterated that operational creditors cannot claim parity with financial creditors in distribution. The tribunal emphasised that the IBC establishes a clear hierarchy which must be respected, and this has had a direct commercial impact. Vendors and suppliers have become more cautious, often restructuring contracts to mitigate insolvency risks.
Interplay Between Secured Rights and Enforcement Laws
The rights of secured creditors are not limited to the IBC alone. Their interaction with other statutes has also been clarified through judicial interpretation.
In M/s Sargam Metals Pvt Ltd vs State Bank of India, the NCLAT examined whether the initiation of CIRP extinguishes the rights of secured creditors under the SARFAESI Act. The tribunal held that the rights of secured creditors to enforce their security interest are not automatically extinguished and must be understood within the broader framework of the IBC. The ruling clarified that while the moratorium under Section 14 restricts enforcement during CIRP, the underlying security interest continues to exist, and their ability to fall back on security enforcement strengthens their negotiating position within the resolution process.
Another critical development comes from Arunkumar Jagatramka vs Jindal Steel and Power Ltd, where the Supreme Court addressed the issue of promoter ineligibility under Section 29A. The Court held that promoters who are ineligible to submit a resolution plan cannot indirectly regain control through schemes of arrangement under the Companies Act. This ensures that the insolvency process is not misused to allow defaulting promoters to regain assets, and this judgment has strengthened creditor confidence and ensured that the resolution process remains transparent and credible.
Practical Impact on Business and Credit Strategy
The distinction between secured and operational creditors has profound implications for both creditors and businesses.
- For creditors, it determines recovery probability and influence in decision-making. Secured creditors enjoy higher recovery rates and significant control through the CoC.
- For businesses, this distinction influences financing structures. A common mistake clients make is over-reliance on secured borrowing, which can restrict flexibility during distress.
Normally, companies with balanced capital structures and diversified creditor bases are better equipped to navigate insolvency scenarios, and Operational creditors, on the other hand, must adopt risk mitigation strategies such as advance payments, security arrangements, or contractual safeguards.
Hence, the distinction between secured and operational creditors under IBC is central to the insolvency framework and has been consistently reinforced through judicial interpretation, and importantly, understanding this hierarchy is essential for making informed financial and commercial decisions. Practically, what we have seen is that stakeholders who align their strategies with this framework are better positioned to manage risk and maximise recovery, and it is to be understood that IBC is designed to prioritise certainty, value maximisation, and efficient resolution, and the treatment of creditors reflects these objectives in both law and practice.