Are TReDS Financiers Operational or Financial Creditors under the IBC?

[Keshav Agarwal is a third year student at Gujarat National Law University]

Introduction

The Trade Receivables Discounting System (“TReDS”) was established for financing the Micro, Small and Medium Enterprises ("MSME") trade receivables through discounted invoices and factoring facilities. Some important provisions of the recently issued RBI TReDS Directions, 2026 concerning the assignment of receivables, without recourse financing, and re-discounting have made the TReDS mechanism more potent. However, the position relating to the treatment of receivables assigned under TReDS in case they fall under Corporate Insolvency Resolution Process ("CIRP") proceedings in the future because of insolvency of the buyer remains unclear. It has been decided by NCLAT in the case of Canbank Factors Ltd. v. Brijesh Singh Bhaduria that TReDS does not create any financial debt, and thus, the financier stands as the operational creditor of the supplier.

Legal Structure of TReDS Financing

In the TReDS regime, the MSME supplier uploads their invoice that is raised against the buyer into the system for approval and financing. Once the buyer approves the factoring unit, the financiers discount the invoice and make instant funding available to the MSME supplier in exchange for a reduced amount. As seen from the above explanation, the transaction results in the quick realization of trade receivables and the risk of delayed payment for the financier.

The Reserve Bank of India (Trade Receivables Discounting System) Directions, 2026 makes the assignment arrangement for such transactions more secure. Under Clause 16, provision made by the financier under TReDS results in an assignment of receivables to the financier, and such assignment takes place via the Central Registry of Securitisation Asset Reconstruction and Security Interest of India ("CERSAI") system. Further, under Clause 19, the TReDS provision is said to be “without recourse”, which means that any default by the buyer becomes the sole responsibility of the financier once the discounting is done.

Though the above framework envisages receivable based financing with assignment, the exact classification of the assigned receivables under Insolvency and Bankruptcy Code (2016) ("IBC") is not clear.

The Classification Problem under the IBC

The central legal issue surrounding the TReDS mechanism is the classification of the financier in terms of whether he shall be treated as operational or financial creditor following the assignment of the invoices. The significance of this issue relates to the right of being part of CoC and waterfall hierarchy of recovery.

A. Operational Creditor Argument

The first reason why it may be argued that the financier should be considered as an operational creditor is linked to the origin of the debt. As per Section 5(21) of the IBC Act, operational debt includes any debts that originate from the sale of goods or services or from the process of employment. In the case of TReDS, the debt begins when the MSME seller sells goods or services to the corporate buyer.

Furthermore, legal precedent goes to support the above argument under the principle of “stepping into the shoes”. According to this principle, an assignee gets all the privileges of the assignor in case of assignment of a debt. Thus, the finance provider acquires the identity of an operational creditor just like the assignor under the assignment of debt.

Moreover, in some cases like those of Canbank Factors Ltd. v. Brijesh Singh Bhaduria (RP) and Mudraksh Investfin Pvt. Ltd., the NCLAT has ruled that discounting of the invoice or factoring shall amount to an operational debt. The reason for such a ruling is that depending on the transaction made initially, the debt is categorized as either an operational or financial one and not by the person claiming the debt or the model of business involved. In essence, what is initially considered an operational transaction remains operational even after assignment.

B. Argument Supporting Financial Creditor Status

On the contrary, however, the argument in favour of financial creditors will be based on the fact that TReDS falls under economic structuring. As per Section 5(8) of the IBC, financial debt may include the definition of “debt, including interest, if any, arising from a liability made available having regard to the time value of money.” The TReDS lender gives an advance to the MSME at a reduced rate of cost, which is just the time value of money.

One crucial aspect of analysis in the context is that credit exposure under TReDS occurs independently and is not simply about collecting the receivable amount. Unlike a simple trade receivable transaction, the risk in TReDS transactions is transferred to the lender and not with the seller of goods; it is a regular feature of financial debt. As mentioned earlier, “receivables sold or discounted” have been considered a part of the term “financial debt” itself in Section 5(8)(e) of the code; however, it refers to receivables that are not sold non-recourse basis.

The proponents of such a status argue that the approach followed in dealing with financiers amounts to an overlooking of the financing structure of the financiers. Unlike other suppliers, TReDS financiers do not provide goods but rather finance the transactions. If the financiers are left out in the CoC, then they will not be able to vote in any resolution on the future of the corporate debtor although they are under the financial risk. This simply implies that the party who bears the financial risk will not be involved in the process of decision-making.

Why the Ambiguity Matters

The issue of categorizing the financiers of TReDS is not just a mere theoretical issue but an important one in terms of its practicality for the insolvency process. To explain this point further, the categorization of financiers as operational creditors implies that these financiers will not belong to the CoC. Also, they will not have any right to vote on the resolution plan of the corporate debtor.

On the other hand, financiers can participate in meetings, provided that they have at least 10% of the total company’s debt. Priority for receiving funds depends on whether the financier is classified as an operational creditor. Based on the waterfall schedule in Section 53, an operational creditor gets much less money than a financial creditor. It can even happen that the money obtained by the operational creditor amounts to almost nothing.

Another issue faced by the financiers is related to section 14 of IBC, where the moratorium rule prohibits the initiators from taking measures for independent recovery. Therefore, owing to the uncertain position of the operational creditors, and inability to exercise control over the process of insolvency, the risks premium rises. This implies that institutional financing may not be attractive owing to the unpredictability of the process.

Conclusion

In current judicial practice, where the “step into the shoes” theory, whose aim is the maintenance of the operational character of the TReDS debt, prevails, it is obvious that the risk taken by financiers is ignored. In this regard, bearing in mind the necessity of the long-term sustainability of TReDS, there is no doubt that the suggested reform is that the IBC/RBI needs to clarify the status of the TReDS financier in CIRP.

It could be done by amending Section 5(8) of the IBC Act or by RBI guidelines for the “without recourse” funding provided by the TReDS financiers, which could deem them as “deemed financial creditors.” The reason being, it would be illogical to allow such a “puppet show” of CoC, whereby only the entities, which have borne the credit risks themselves, get excluded from the process. Simply put, the uncertainty in the case of insolvency means certain doom for the digital receivables financing system in India.