NCLAT on TReDS Reverse Factoring: Financial Debt or Operational Debt under IBC?

Updated 29 July 2026 | NCLAT Principal Bench, New Delhi

A recent NCLAT decision has important implications for banks, NBFCs, MSME suppliers, resolution professionals and companies using the Trade Receivables Discounting System (TReDS). In The South Indian Bank Ltd. v. Brijesh Singh Bhadauriya, Resolution Professional for RCI Industries and Technologies Limited, Company Appeal (AT) (Insolvency) No. 597 of 2025, the Appellate Tribunal held that a reverse-factoring exposure arising from discounted trade receivables remained operational debt under the Insolvency and Bankruptcy Code, 2016 (IBC), rather than becoming financial debt merely because a bank financed the invoices.

The distinction matters. Financial creditors ordinarily participate in the Committee of Creditors (CoC) and exercise voting rights, while operational creditors occupy a materially different position in the insolvency process and liquidation waterfall. For financiers participating in TReDS, the judgment therefore goes directly to claim classification, CoC participation, recovery strategy and documentation.

1. Case at a glance

Case: The South Indian Bank Ltd. v. Brijesh Singh Bhadauriya, RP of RCI Industries and Technologies Limited.

Forum: National Company Law Appellate Tribunal, Principal Bench, New Delhi.

Appeal: Company Appeal (AT) (Insolvency) No. 597 of 2025.

Judgment date: 29 July 2026.

Core issue: Whether credit extended through a TReDS reverse-factoring mechanism should be treated as financial debt under Section 5(8) of the IBC or operational debt under Section 5(21).

Outcome: The NCLAT dismissed the appeal and affirmed the NCLT order. It held that the TReDS reverse-factoring claim in the facts before it was operational debt, not financial debt.

2. How the TReDS transaction worked

RCI Industries and Technologies Limited was registered as a buyer on the M1 Exchange TReDS platform. Its suppliers supplied goods in the ordinary course and uploaded invoices to the platform. After the corporate debtor confirmed the invoices, financiers could bid to discount them. When South Indian Bank’s bid was accepted, the bank paid the supplier at a discounted value and obtained an assignment of the trade receivable. The corporate debtor was then required to make payment to the financier on the due date.

Between August 2019 and February 2020, the bank funded such invoices. When the corporate debtor defaulted, the bank’s TReDS exposure was approximately ₹17.92 crore. South Indian Bank also had a separate cash-credit exposure of approximately ₹20.63 crore.

3. What happened during CIRP

CIRP against RCI Industries commenced after a Section 9 application was admitted on 25 November 2022. South Indian Bank filed a claim of about ₹38.54 crore in Form C as a financial creditor. The Resolution Professional accepted the cash-credit portion as financial debt but treated the TReDS portion as operational debt and asked the bank to file that component in Form B.

The bank challenged the classification before the NCLT under Section 60(5) of the IBC, seeking recognition of the TReDS exposure as financial debt. The NCLT rejected the application on 13 February 2025, relying on the earlier NCLAT decision in Mudraksh Investfin Private Limited v. Brijesh Singh Bhadauriya concerning a similar TReDS arrangement involving the same corporate debtor.

4. South Indian Bank’s argument: reverse factoring is financing

The bank argued that the arrangement was not merely an assignment of an ordinary trade payable. In a reverse-factoring structure, it said, the buyer initiates or anchors the financing arrangement, the financier pays the supplier, and the buyer becomes directly liable to repay the financier. The bank relied on provisions of the Master Financier Agreement and Master Buyer Agreement dealing with payment obligations, penal interest and recourse against the buyer.

It contended that the transaction fell within Section 5(8)(e), which includes certain receivables sold or discounted, and alternatively Section 5(8)(f), which captures transactions having the commercial effect of borrowing. It also argued that the earlier Mudraksh decision should not control the matter because the present financier was a scheduled commercial bank and because the documentation allegedly demonstrated a separate financing relationship with the buyer.

5. NCLAT’s reasoning: the underlying character of the debt remained operational

The NCLAT focused on the substance and origin of the liability. The suppliers had supplied goods to the corporate debtor. Those trade payables were operational in character. The bank acquired the receivables through the TReDS discounting process, but the Tribunal held that assignment did not change the fundamental nature of the underlying debt.

The judgment stresses that Section 5(8) requires a debt disbursed against consideration for the time value of money. On the facts before it, the Tribunal found no disbursement to the corporate debtor. The bank paid suppliers against discounted invoices. In the NCLAT’s view, the financier effectively stepped into the shoes of the suppliers in respect of the assigned receivables.

The Tribunal also relied on the principle that an assignee of operational debt remains an operational creditor. If every factoring or invoice-discounting transaction automatically converted an operational payable into financial debt, the statutory distinction between operational and financial debt would be undermined.

6. Why Mudraksh remained important

The NCLAT considered its earlier ruling in Mudraksh Investfin Private Limited to be closely applicable. That case also involved factoring through the TReDS platform, and the Tribunal had held that where the debt emanated from sale and purchase of goods and no disbursement was made to the corporate debtor, the financier’s claim was operational rather than financial.

South Indian Bank tried to distinguish Mudraksh on several grounds, including its status as a scheduled commercial bank and the wording of the governing agreements. The NCLAT rejected those distinctions as sufficient to alter the classification. The identity of the claimant does not by itself determine whether a debt is financial or operational; the substance of the underlying transaction remains central.

7. The procedural problem also mattered

The case also contains an important claims-management lesson. The Resolution Professional had asked the bank in December 2022 to submit the TReDS component in Form B as an operational creditor. The bank continued to litigate for financial-creditor status and filed Form B only in March 2025, after the CoC had already approved the resolution plan.

While the appeal was pending, the NCLT approved the resolution plan on 9 October 2025. The plan was implemented, creditor payments were made and the monitoring committee was dissolved. The NCLAT noted these developments while refusing relief. For creditors, the practical message is clear: contesting classification should not necessarily mean failing to protect an alternative claim position where the insolvency timetable is moving forward.

8. What the ruling means for banks and TReDS financiers

First, a financier should not assume that buyer-led reverse factoring will automatically confer financial-creditor status under the IBC. Documentation, cash-flow mechanics and the legal origin of the receivable need to be examined carefully.

Second, the difference between direct lending to the corporate debtor and purchase or assignment of trade receivables remains critical. Where the exposure fundamentally traces back to goods or services supplied to the corporate debtor, a tribunal may continue to view the debt as operational despite financing features such as discounting, direct buyer repayment obligations or penal charges.

Third, lenders using TReDS should review insolvency classification risk while structuring facilities rather than only after a default. Facility documentation should clearly record the commercial arrangement, rights of recourse, repayment obligations and the economic substance of the financing. Even then, contractual drafting cannot override the statutory character of the transaction.

9. What the ruling means for MSMEs and corporate buyers

TReDS remains an important liquidity mechanism for MSMEs because suppliers can obtain early payment without waiting for the buyer’s normal credit period. This decision does not invalidate or restrict TReDS financing. Its significance is narrower: it addresses how a financier’s claim may be classified when the buyer later enters insolvency.

Corporate buyers should understand that TReDS obligations can continue to create substantial insolvency exposure even though the immediate supplier has already received payment from the financier. Treasury and finance teams should therefore treat TReDS maturities as part of their broader working-capital and default-risk monitoring.

10. Practical checklist for resolution professionals

A Resolution Professional dealing with a TReDS claim should examine: the original supply transaction; the factoring or reverse-factoring structure; whether the receivable was assigned; who received the financier’s disbursement; whether the corporate debtor received funds directly or indirectly; the existence of interest or discounting; recourse provisions; the platform agreements; and the timing and form in which the creditor submitted its claim.

Classification should not be based only on the label used by the financier or the regulatory identity of the claimant. The NCLAT’s approach is transaction-focused.

11. Financial debt vs operational debt: why the classification matters

Under the IBC, classification affects more than terminology. A financial creditor may have representation and voting power in the CoC, subject to the Code. Operational creditors generally do not enjoy equivalent voting rights. Classification can also affect treatment under a resolution plan and the applicable position in liquidation.

For a lender with a large TReDS book, the difference can materially affect recoverability. For insolvency professionals, incorrect classification can affect CoC constitution, voting percentages and the overall resolution process.

12. Frequently asked questions

Is every TReDS claim operational debt?

The judgment should not be read as a universal rule divorced from facts and documentation. The NCLAT decided the particular reverse-factoring structure before it. Classification in another transaction should be tested against the IBC and the actual contractual and economic arrangement. However, this decision is an important precedent against assuming that invoice discounting or assignment alone creates financial debt.

Does payment of discount or penal interest make the claim financial debt?

Not by itself. The NCLAT looked at the transaction as a whole and emphasized the origin of the receivable and absence of disbursement to the corporate debtor. Financing economics are relevant, but they are not the only factor.

Can a bank be an operational creditor?

Yes. The legal character of the debt depends on the transaction, not simply on whether the claimant is a bank, NBFC or other financial institution.

Should a creditor file an alternative claim while classification is disputed?

Creditors should obtain case-specific legal advice, but this judgment illustrates the risk of allowing the insolvency process to advance while a classification dispute remains unresolved. Preserving available procedural rights within statutory timelines can be important.

13. Key takeaway

The South Indian Bank ruling reinforces a substance-over-label approach under the IBC. A TReDS reverse-factoring transaction may contain strong financing features, but where the debt ultimately arises from the supply of goods and the financier acquires the underlying trade receivable, the claim may remain operational in character. For lenders and corporates using TReDS at scale, insolvency classification should now be treated as a structuring and risk-management issue, not merely a claims-admission issue after default.

14. How PGT & Associates can assist

PGT & Associates advises businesses, creditors and professionals on Companies Act, IBC, NCLT/NCLAT and corporate restructuring matters, including review of creditor claims, insolvency documentation, transaction classification and practical compliance implications. If your organisation has a TReDS, factoring, creditor-classification or NCLT issue, obtain advice based on the specific agreements and facts before taking a position in CIRP.

For professional enquiries, visit https://www.pgtandassociates.com/ or contact PGT & Associates through the website.

Primary sources and further reading

NCLAT judgment: The South Indian Bank Ltd. v. Brijesh Singh Bhadauriya, Company Appeal (AT) (Insolvency) No. 597 of 2025, judgment dated 29 July 2026. Official facilitation copy available through the Insolvency and Bankruptcy Board of India orders database: https://ibbi.gov.in/orders/nclat

For the statutory framework, refer to the Insolvency and Bankruptcy Code, 2016 and current IBBI materials. For TReDS mechanics and regulatory requirements, refer to applicable Reserve Bank of India directions and guidelines.

Disclaimer: This article is for general informational purposes only and does not constitute legal, tax or insolvency advice. The classification and treatment of a claim depend on the documents, facts, applicable law and subsequent judicial developments. Readers should obtain professional advice before acting.