A) ABSTRACT / HEADNOTE

This case pertains to the interpretation of Sections 5(6), 5(8), and 5(21) of the Insolvency and Bankruptcy Code, 2016 (IBC). It specifically examines whether amounts described as security deposits under service agreements constitute financial debt, operational debt, or neither. The Supreme Court upheld the National Company Law Appellate Tribunal’s (NCLAT) decision, confirming the security deposit as financial debt under the IBC. The judgment provides clarity on determining financial debt through the time value of money test, the real nature of agreements, and the correlation between debt claims and services rendered.

Keywords: Insolvency and Bankruptcy Code, Financial Debt, Operational Debt, Time Value of Money, Nature of Transactions

B) CASE DETAILS

i) Judgment Cause Title
Global Credit Capital Limited & Anr. v. Sach Marketing Pvt. Ltd. & Anr.

ii) Case Number
Civil Appeal No. 1143 of 2022

iii) Judgment Date
25 April 2024

iv) Court
Supreme Court of India

v) Quorum
Justice Abhay S. Oka and Justice Pankaj Mithal

vi) Author
Justice Abhay S. Oka

vii) Citation
[2024] 5 S.C.R. 215 : 2024 INSC 340

viii) Legal Provisions Involved

• Insolvency and Bankruptcy Code, 2016
  • Section 3(6): Definition of claim
  • Section 3(11): Definition of debt
  • Section 5(7): Financial creditor
  • Section 5(8): Financial debt
  • Section 5(21): Operational debt

ix) Judgments Overruled by the Case
None explicitly mentioned.

x) Case is Related to which Law Subjects
Corporate Law, Insolvency Law, Commercial Law

C) INTRODUCTION AND BACKGROUND OF JUDGMENT

The appeals arose from judgments delivered by the NCLAT, which upheld the claim that amounts provided as security deposits under agreements qualified as financial debt. The issue revolved around two agreements executed by the corporate debtor with the creditor, wherein substantial amounts were advanced under the guise of security deposits with 21% interest. The National Company Law Tribunal (NCLT) had initially denied the classification of the creditor as a financial creditor, leading to appeals.

The dispute was deeply rooted in the interpretation of the terms “financial debt” and “operational debt” under the IBC. The case turned on the nature of the agreements and the relevance of the time value of money doctrine to determine the debt’s classification.

D) FACTS OF THE CASE

1. Corporate Debtor: Mount Shivalik Industries Limited.
2. Claimant/Creditor: Sach Marketing Pvt. Ltd., engaged under service agreements as a sales promoter for the debtor.
3. Two service agreements (1 April 2014 and 1 April 2015) required Sach Marketing to deposit ₹53,15,000/- with the debtor, offering 21% annual interest.
4. The security deposit terms included no clauses for forfeiture or deduction, making the amounts refundable with interest.
5. The financial statements treated these amounts as loans or long-term liabilities.
6. The claimant initially filed as an operational creditor but refiled as a financial creditor. The NCLT denied financial creditor status, citing lack of direct lending intent.
7. The NCLAT overturned this view, leading to the present appeal.

E) LEGAL ISSUES RAISED

1. Whether the amounts deposited qualify as “financial debt” under Section 5(8) of the IBC?
2. Does the real nature of the agreement override its stated purpose to classify the debt?
3. Can security deposits with interest be treated as loans having the commercial effect of borrowing?

F) PETITIONER/APPELLANT’S ARGUMENTS

• The agreements’ purpose was to appoint a sales promoter and not to secure financial assistance.
• The amounts deposited were conditional to the service agreements and lacked any loan-like characteristics.
• The absence of a clause regarding forfeiture only indicated good faith in commercial dealings.
• Reliance was placed on the definitions of operational debt under Section 5(21), highlighting the agreements’ focus on services.
• Interest payments alone cannot classify a deposit as financial debt.
• Judicial precedents, including Swiss Ribbons Pvt. Ltd. v. Union of India, were invoked to highlight that financial debt requires disbursal for time value of money.

G) RESPONDENT’S ARGUMENTS

• The security deposits bore all characteristics of financial debt, including fixed tenure, interest payment, and refund obligation.
• The agreements were tools for raising finance under the guise of service contracts.
• The corporate debtor’s financial statements and TDS deductions on interest payments clearly established the commercial effect of borrowing.
• Clause (f) of Section 5(8), a catch-all provision, supported the respondent’s classification of the transaction.
• Judicial reliance was placed on Pioneer Urban Land and Infrastructure Ltd. v. Union of India, which broadened the scope of financial debt to include transactions with borrowing effects.

H) JUDGMENT

a. Ratio Decidendi

• The amounts deposited under the agreements constitute financial debt as they satisfy the time value of money test.
• The agreements, despite their title, functionally resemble loan contracts, evidenced by the interest obligation and non-forfeiture clause.

b. Obiter Dicta

• The Court emphasized that documentary intent must align with commercial substance in debt classification.

c. Guidelines

1. Time Value of Money: Key test for financial debt under Section 5(8).
2. Real Nature of Agreements: Interpretation must look beyond nomenclature to identify the transaction’s commercial intent.
3. Operational Debt: Requires a direct nexus between the debt and services rendered.

I) CONCLUSION & COMMENTS

The decision reaffirms a pragmatic approach to debt classification under the IBC. It underscores the importance of substance over form, aligning legal interpretation with economic realities. The case strengthens the framework for distinguishing financial and operational debts, ensuring consistency in insolvency proceedings.

J) REFERENCES

a. Important Cases Referred

1. Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17.
2. Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416.
3. Anuj Jain v. Axis Bank Limited, (2020) 8 SCC 401.
4. Phoenix ARC Pvt. Ltd. v. Spade Financial Services Ltd., (2021) 3 SCC 475.

b. Important Statutes Referred

1. Insolvency and Bankruptcy Code, 2016.
2. Real Estate (Regulation and Development) Act, 2016.