Corporate Restructuring, Valuation and Insolvency · Application for Corporate Insolvency Resolution Process

Operational Creditor and Operational Debt under the IBC

Updated 11 October 2026 · Fact-checked

An operational creditor is a person owed an operational debt. Operational debt is a claim for goods or services, including employment, or for dues under any law payable to the Government or a local authority. To start CIRP, the debt must be in default and the default must meet the minimum amount in section 4, which is ₹1 crore.

Understand Operational Creditor and Operational Debt

The Code sorts creditors into two main groups. A financial creditor lends money against the time value of money. An operational creditor is paid for goods, services, employment or statutory dues. The label depends on the nature of the debt, not on who the creditor is.

Section 5(21) defines operational debt as a claim in respect of the provision of goods or services including employment, or a debt in respect of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority. So a supplier's unpaid invoice, an employee's unpaid wages and a tax or duty due to the Government all fit here. Section 5(20) defines an operational creditor as a person to whom an operational debt is owed, including a person to whom the debt has been legally assigned or transferred.

Compare this with section 5(8). Financial debt is a debt, with interest if any, disbursed against consideration for the time value of money. It covers borrowing against interest, bonds and debentures, finance leases, and similar items. A trade credit given only for delivering goods carries no time value of money. That is why the supplier is operational, not financial.

Two more ideas decide whether an operational creditor can succeed. First, default. Under section 3(12), default means non-payment of a debt when the whole or any part or instalment of the amount has become due and payable and is not repaid. Second, the minimum threshold. Section 4 sets the minimum amount of default for CIRP at ₹1 crore, as raised by notification from the earlier ₹1 lakh. The Code lets the Government change this amount by notification, so check the current figure.

Finally, an operational creditor must first serve a demand notice and give the debtor a chance to point out a dispute. Section 5(6) says a dispute includes a suit or arbitration proceedings relating to the existence of the amount of debt, the quality of goods or service, or breach of a representation or warranty. A real, pre-existing dispute is the main defence against an operational creditor's application.

Key rules to remember

Operational creditor: Operational creditor = person owed an operational debt (including a legal assignee or transferee); Section 5(20). Look at the nature of the debt, not the status of the creditor.
Operational debt: Operational debt = claim for goods or services (including employment) + dues under any law payable to the Central Government, a State Government or a local authority; Section 5(21). Employees and Government departments can be operational creditors.
Financial debt test: Financial debt = debt disbursed against consideration for the time value of money; Section 5(8). Includes money borrowed against interest, debentures, finance leases and similar items.
Default: Default = whole or any part or instalment of a debt due and payable, and not repaid; Section 3(12). The debt must be due and payable, not merely owed.
Minimum default: Minimum amount of default for CIRP = ₹1 crore; Section 4, as notified. The Government can change it by notification.
Dispute: Dispute includes a suit or arbitration relating to (a) existence of the debt, (b) quality of goods or service, (c) breach of representation or warranty; Section 5(6). It is the usual ground to resist a section 9 application.

How to solve Operational Creditor and Operational Debt questions

Use this order for any case question on whether a person can start CIRP as an operational creditor.

1Identify the claim. State exactly what is owed: goods supplied, services rendered, wages, or Government dues.
2Classify it. Apply section 5(21) for operational debt and section 5(8) for financial debt. Ask whether money was lent for the time value of money.
3Name the creditor type under section 5(20) or section 5(7), and note any legal assignment.
4Test default. Check that the amount is due and payable under the contract or law and has not been paid, in whole or in part.
5Test the threshold. Compare the amount of default with ₹1 crore under section 4.
6Check for a dispute under section 5(6). Look for a suit or arbitration, or a notice of dispute, that existed before the demand notice.
7Conclude. Say whether the creditor is operational, whether default and threshold are met, and whether the demand notice and section 9 route can proceed.

Quickest way: Three-question filter

When to use it: Use it when a question lists several claims and asks you to classify them quickly.

Was money lent against interest or its time value? If yes, it is financial debt.
If not, was it for goods, services, employment or a legal due to the Government or a local authority? If yes, it is operational debt.
Then check two numbers: is the amount due and unpaid, and is it at least ₹1 crore? Close with a one-line check for any pre-existing dispute.

Common mistakes in Operational Creditor and Operational Debt

Treating every unpaid supplier as a financial creditor because money is owed.
Students focus on the money owed and ignore why it is owed.
Fix: Apply section 5(8). Trade credit for goods lacks the time value of money element, so the supplier is operational.
Saying Government dues cannot be operational debt.
Students think only commercial contracts count.
Fix: Quote section 5(21). Dues under any law payable to the Central Government, a State Government or a local authority are operational debt.
Forgetting employees and workmen can be operational creditors.
Students link insolvency only with banks and suppliers.
Fix: Section 5(21) covers claims in respect of employment. Unpaid wages are operational debt.
Quoting the old ₹1 lakh threshold.
Older notes and books still carry the earlier figure.
Fix: State that section 4 sets the minimum default, now ₹1 crore by notification, and that the Government can change it.
Ignoring the dispute and concluding that the application must be admitted.
Students stop once default and threshold are shown.
Fix: Always check section 5(6). In Mobilox Innovations v. Kirusa Software, the Supreme Court held that the question is whether a dispute truly existed before the demand notice, and that a plausible pre-existing dispute is a ground to reject a section 9 application.
Confusing default with the debt being merely outstanding.
Students skip the 'due and payable' condition in section 3(12).
Fix: Check the due date. If payment is not yet due, there is no default.

Worked examples

Example 1

Classify each claim against Bharat Steels Ltd as operational or financial debt: (a) Kumar Traders supplied raw material worth ₹1,25,00,000 on 60 days' credit, unpaid; (b) Canara Bank term loan of ₹5,00,00,000 with interest; (c) three months' unpaid salary to the plant manager; (d) GST dues payable to the Central Government.

Show the solution

(a) The claim is for goods supplied on credit. There is no borrowing against interest. It is operational debt under section 5(21), and Kumar Traders is an operational creditor.
(b) A term loan is money borrowed against the payment of interest, covered by section 5(8)(a). It is financial debt, and the bank is a financial creditor.
(c) Salary is a claim in respect of employment. It is operational debt, and the manager is an operational creditor.
(d) Dues arising under a law and payable to the Central Government are operational debt under section 5(21).

Answer: (a), (c) and (d) are operational debt. (b) is financial debt.

Example 2

Sunrise Packaging Ltd supplied packaging goods worth ₹1,40,00,000 to Deccan Foods Ltd. The invoice fell due on 31 March and was not paid. Sunrise served a demand notice. Deccan Foods replied within the notice period that it had filed a suit on 10 January, before the notice, claiming that the goods were of defective quality. Can Sunrise succeed in a section 9 application?

Show the solution

Classify the claim. It is for goods supplied, so it is operational debt under section 5(21). Sunrise is an operational creditor.
Test default. The invoice is due and unpaid, so there is default under section 3(12).
Test the threshold. ₹1,40,00,000 is more than the ₹1 crore minimum in section 4, so the threshold is met.
Check the dispute. Section 5(6) includes a suit relating to the quality of goods. The suit was filed on 10 January, before the demand notice, so it is a pre-existing dispute.
Apply the principle in Mobilox Innovations v. Kirusa Software. If a real dispute existed before the notice, the application is liable to be rejected, since the Tribunal does not decide the merits of the dispute itself.

Answer: Sunrise is an operational creditor with default above the threshold. But the pre-existing suit on quality is a dispute under section 5(6), so its application is likely to be rejected, provided the dispute is genuine and not a moonshine defence.

Exam tips

Open every classification answer by quoting the section: 5(20) and 5(21) for operational, 5(8) for financial.
Write a comparison in a short list: nature of debt, time value of money, who it is owed to, and the route to start CIRP (section 9 for operational creditors).
In case questions, test default and the ₹1 crore threshold with figures before you state a conclusion.
Always mention the dispute check from section 5(6) and the demand notice before a section 9 application. Examiners reward this link.
Mention that Government dues and employee claims are operational debt. These are favourite short-note points.

Practice questions from Application for Corporate Insolvency Resolution Process

Operational Creditor and Operational Debt: frequently asked questions

What is operational debt under section 5(21) of the IBC?

It is a claim in respect of the provision of goods or services including employment. It also covers dues under any law payable to the Central Government, a State Government or a local authority. Trade payables, wages and tax dues are typical examples.

What is the difference between an operational creditor and a financial creditor?

A financial creditor is owed a financial debt, which is disbursed against the time value of money, such as a loan or debenture. An operational creditor is owed for goods, services, employment or statutory dues. The two follow different routes to start CIRP: sections 7 and 9 respectively.

What is the minimum default amount for CIRP under the IBC?

Section 4 sets the minimum amount of default. By notification it is ₹1 crore, raised from the earlier ₹1 lakh. The Government can change it by notification, so confirm the current figure.

Can a Government department be an operational creditor?

Yes. Dues arising under any law and payable to the Central Government, a State Government or a local authority are operational debt under section 5(21). The department owed such dues is an operational creditor.