TReDS Reverse Factoring Under IBC: NCLAT Says Financier’s Claim Remains Operational Debt

Trade receivables financing through TReDS is designed to accelerate MSME cash flows. But when the buyer enters insolvency, a harder question arises: does the bank or financier that discounted the supplier’s invoice rank as a financial creditor, or does it merely step into the supplier’s shoes as an operational creditor? The National Company Law Appellate Tribunal (NCLAT), Principal Bench, addressed this directly in The South Indian Bank Ltd. v. Brijesh Singh Bhadauriya, Company Appeal (AT) (Insolvency) No. 597 of 2025, decided on 29 July 2026.

Why the ruling matters

The decision is commercially significant because TReDS transactions often sit at the intersection of trade credit, receivables assignment and institutional finance. A lender may economically view the arrangement as buyer-led financing, especially in reverse factoring. The IBC, however, classifies claims by legal substance. NCLAT held that the mere presence of a bank, discount, delayed-payment interest or an assignment deed does not convert an underlying trade payable into financial debt.

The transaction structure before NCLAT

RCI Industries and Technologies Limited participated as a buyer on the M1 Exchange TReDS platform. Its MSME suppliers uploaded invoices, the buyer confirmed them, and South Indian Bank discounted selected invoices. The bank paid the suppliers immediately and received assignments of the receivables. The buyer was then required to pay the invoice amount to the bank on the due date. The bank’s total insolvency claim was approximately ₹38.54 crore, of which about ₹17.92 crore related to the TReDS exposure.

The Resolution Professional accepted the bank’s cash-credit exposure as financial debt but classified the TReDS portion as operational debt and asked the bank to file that part in Form B. The bank challenged the classification and sought financial-creditor treatment.

The statutory test: Sections 5(8), 5(20) and 5(21) of the IBC

Section 5(8) defines financial debt around the concept of a debt disbursed against consideration for the time value of money and includes specified categories, such as receivables sold or discounted other than receivables sold on a non-recourse basis and transactions having the commercial effect of borrowing. Section 5(21), by contrast, covers claims arising from the provision of goods or services as operational debt. Section 5(20) is especially important in assignments: a person to whom operational debt is legally assigned or transferred becomes an operational creditor.

NCLAT emphasised that the common thread across Section 5(8) remains disbursement against time value of money. A transaction cannot become financial debt simply because its documentation uses financing terminology or because one of the inclusive clauses can be invoked in isolation.

Why the bank remained an operational creditor

On the facts, no money was disbursed by South Indian Bank to the corporate debtor. The bank paid the MSME suppliers. What was assigned to the bank was the suppliers’ existing right to receive payment for goods already sold. The buyer’s obligation therefore remained the same trade payable; only the person entitled to collect it changed.

NCLAT rejected the argument that the discount earned by the financier, or interest payable on delay, necessarily represented consideration for a loan to the buyer. In the Tribunal’s analysis, that remuneration reflected compensation for paying a trade receivable early rather than a separate borrowing raised by the corporate debtor.

The Tribunal therefore held that the TReDS reverse-factoring exposure was operational debt under Section 5(21), not financial debt under Section 5(8). It treated its earlier decisions in Mudraksh Investfin Pvt. Ltd. v. Brijesh Singh Bhadauriya and Minions Ventures Pvt. Ltd. v. TDT Copper Ltd. as reinforcing the same principle.

A separate warning: litigate classification without abandoning claim protection

The judgment contains an equally important procedural lesson. The Resolution Professional had asked the bank in December 2022 to file the TReDS claim as operational debt in Form B. The bank instead continued to press only for financial-creditor status and filed Form B much later, after the committee of creditors had approved the resolution plan. NCLAT held that the claim had not been ignored; the bank had declined to lodge it in the category identified by the Resolution Professional while pursuing its challenge.

For professionals, the practical approach is obvious: where classification is disputed, consider filing the claim in the category directed by the Resolution Professional under protest, while separately preserving the legal challenge. A creditor should not assume that success on a later classification argument will reopen a completed insolvency process.

Finality of an implemented resolution plan

By the time the appeal was decided, the resolution plan had been approved and fully implemented, payments had been made, and the monitoring committee had been dissolved. NCLAT observed that an approved and implemented resolution plan acquires a binding and largely irreversible character. Reclassification at that stage would have disturbed a completed resolution and prejudiced stakeholders who had acted on the plan.

Practical implications for banks, NBFCs, MSMEs and insolvency professionals

First, transaction labels are not decisive. Teams should map the actual flow of funds, the original source of the liability and the legal effect of assignment before deciding whether a TReDS exposure belongs in Form C or Form B. Second, disbursement to the supplier rather than the corporate debtor can be decisive where the liability remains traceable to goods supplied. Third, assignment documentation should be reviewed carefully: an assignee ordinarily acquires the claim with its existing legal character unless the structure creates a genuinely independent financial obligation. Fourth, claim strategy must be defensive as well as argumentative. Protect the claim in the available category while challenging classification, rather than allowing a procedural dispute to outlive the resolution process. Fifth, lenders using TReDS should separately assess IBC ranking risk when underwriting buyer exposures; commercial credit risk and insolvency voting rights are not the same thing.

TReDS remains important for MSME liquidity

RBI describes TReDS as an electronic platform for financing or discounting MSME trade receivables through multiple financiers. It recognises both factoring and reverse factoring and states that transactions processed on TReDS are without recourse to the MSME seller. NCLAT’s ruling does not undermine that financing model. It instead clarifies how a particular assigned receivable is classified when the buyer later enters CIRP.

Conclusion

South Indian Bank v. Brijesh Singh Bhadauriya is a strong reminder that insolvency classification follows the substance and origin of the obligation. Where a financier pays suppliers against assigned trade receivables and no independent disbursement is made to the corporate debtor, the financier may remain an operational creditor despite the financing structure. Equally, creditors should not allow a classification dispute to prevent timely filing of their claim in the category identified by the Resolution Professional.

Disclaimer: This article is for general professional information only and does not constitute legal, tax, insolvency or investment advice. The application of the IBC and TReDS documentation is fact-specific. Parties should review the underlying contracts, RBI framework, insolvency records and applicable judicial precedents before taking action.