Law Updates
Are Security Deposits Financial Debts Under IBC? SC Explains!
Key Judicial Interpretation
The Supreme Court clarified that a debt is considered a financial debt under Section 5(8) of the Insolvency and Bankruptcy Code (IBC) if it involves disbursement against the consideration for the time value of money, including transactions with the commercial effect of borrowing (paras 16-17).
Court’s View
The Court emphasized that the real nature of transactions must be examined to determine whether a debt is financial or operational. The security deposits in this case were deemed to have the commercial effect of borrowing, qualifying them as financial debts (paras 14-18).
Conclusion
The Supreme Court upheld the NCLAT’s decision, confirming that the security deposits under the agreements constituted financial debts, making the respondents financial creditors under the IBC (paras 18-19).
Relevant Acts, Sections, Provisions, and Rules Cited
Sections 3(11), 3(6), 5(7), 5(8), 5(21), 60(5), and 7 of the Insolvency and Bankruptcy Code, 2016.
Case of the Appellant
The appellants, Global Credit Capital Limited, argued that the respondents were operational creditors, not financial creditors, as the security deposits were for services and not financial facilities.
Appellant Relied On
The appellants relied on the definitions and interpretations of operational and financial debts under the IBC, and previous Supreme Court judgments, including Swiss Ribbons and Pioneer Urban Land.
Case of the Respondent
The respondents, Sach Marketing Pvt. Ltd., claimed their status as financial creditors, arguing that the security deposits were financial transactions intended to raise finance for the corporate debtor.
Respondent Relied On
The respondents relied on the contractual terms, the payment of interest on security deposits, and the treatment of these amounts in financial statements to support their claim as financial creditors.
Question & Answer
Question: What determines whether a debt is a financial debt under the IBC?
Answer: A debt is considered a financial debt if it involves disbursement against the consideration for the time value of money, including transactions with the commercial effect of borrowing (paras 16-17).
Question: Why did the Supreme Court uphold the NCLAT’s decision?
Answer: The Supreme Court upheld the NCLAT’s decision because the security deposits had the commercial effect of borrowing, qualifying them as financial debts under the IBC (paras 18-19).
Question: What did the Supreme Court say about the real nature of transactions?
Answer: The Court emphasized the importance of examining the real nature of transactions to determine whether a debt is financial or operational, beyond the face value of written agreements (paras 14-15).
Question: How did the Court view the interest payment on security deposits?
Answer: The Court viewed the interest payment on security deposits as indicative of the consideration for the time value of money, supporting the classification of these deposits as financial debts (para 16).
Question: What was the outcome of the appeals filed by Global Credit Capital Limited?
Answer: The Supreme Court dismissed the appeals, confirming that the security deposits were financial debts and the respondents were financial creditors under the IBC (para 21).
Details of Case
Court: Supreme Court of India
Bench: Justice Abhay S. Oka, Justice Pankaj Mithal
Date of Order: April 25, 2024
Case Name: Global Credit Capital Limited & Anr. vs. Sach Marketing Pvt. Ltd. & Anr.
Case No.: Civil Appeal No. 1143 of 2022 with Civil Appeal Nos. 6991-6994 of 2022
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