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2024 SCC OnLine SC 649

In the Supreme Court of India

(BEFORE ABHAY S. OKA AND PANKAJ MITHAL, JJ.)

Civil Appeal No. 1143 of 2022

Global Credit Capital Limited and Another …
Appellants;
Versus
Sach Marketing Pvt. Ltd. and Another …
Respondents.
With
Civil Appeal Nos. 6991-6994 of 2022
Civil Appeal No. 1143 of 2022 and Civil Appeal Nos. 6991-6994 of
2022
Decided on April 25, 2024
Advocates who appeared in this case :
For Appellant(s) Ms. Mithu Jain, AOR
For Respondent(s) Mr. C.U. Singh, Sr. Adv.
Mr. N.P.S. Chawla, Adv.
Mr. Sujoy Datta, Adv.
Ms. Kinjal Goyal, Adv.
Mr. Ashish Rana, AOR
Ms. Bidya Mohan, Adv.
Mr. Karan Batura, AOR
Ms. Anusuya Sadhu Sinha, Adv.
Mr. Siddharth Naidu, Adv.
M/s. KSN & CO., AOR
The Judgment of the Court was delivered by
ABHAY S. OKA, J.:— These appeals take exception to the separate
th th
impugned judgments and orders dated 7 October 2021 and 29
October 2021 passed by the National Company Law Appellate Tribunal
(for short, ‘the NCLAT’). In Civil Appeal no. 1143 of 2022, the issue
involved is whether the first respondent is a financial creditor within the
meaning of sub-section (7) of Section 5 of the Insolvency and
Bankruptcy Code, 2016 (for short, ‘the IBC’). The corporate debtor, in
this case, is M/s. Mount Shivalik Industries Limited. The impugned
judgment and order dated 7th October 2021 holds that the first
respondent is a financial creditor. As far as Civil Appeal nos. 6991-6994
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st th
of 2022 are concerned, the issue is whether the 1 to 4 respondents
therein are financial creditors of the same corporate debtor - M/s.
Mount Shivalik Industries Limited. The impugned judgment dated 29th
October 2021 follows the impugned judgment in Civil Appeal no. 1143
of 2022.
FACTUAL ASPECTS
2. A brief reference to the factual aspects of Civil Appeal no. 1143 of
2022 must be made to understand the controversy. There were two
agreements of 1st April 2014 and 1st April 2015 between the corporate
debtor and the first respondent. The agreements were in the form of
letters addressed by the corporate debtor to the first respondent. By
st
the agreement/letter dated 1 April 2014, the corporate debtor
appointed the first respondent as a ‘Sales Promoter’ to promote beer
manufactured by the corporate debtor at Ranchi (Jharkhand) for twelve
months. One of the conditions incorporated by the corporate debtor in
the said letter/agreement was that the first respondent should deposit
a minimum security of Rs. 53,15,000/- with the corporate debtor,
which will carry interest @21% per annum. The letter provided that the
corporate debtor will pay the interest on Rs. 7,85,850/- @21% per
annum. The terms of the agreement/letter dated 1st April 2015 are
identical. The only difference is that under the second agreement/letter,
the corporate debtor was to pay the interest on Rs. 32,85,850/- @21%
per annum.
3. The Oriental Bank of Commerce invoked the provisions of Section
7 of the IBC against the corporate debtor. The National Company Law
Tribunal (for short, ‘the NCLT’) admitted the application under Section
7 of the IBC by the order dated 12th June 2018. It imposed a
moratorium under Section 14 of the IBC. The second respondent was
appointed as the Interim Resolution Professional. Initially, the first
respondent filed a claim with the second respondent as an operational
th
creditor. The claim was withdrawn, and on 19 September 2018, the
first respondent filed a claim with the second respondent as a financial
creditor. By a communication dated 7th October 2018, the second
respondent informed the first respondent that the first respondent's
claim was accepted partly as an operational debt and partly as a
financial debt. After the first respondent submitted Form-B, the second
respondent rejected the claim on the ground that the first respondent
could not be considered a financial creditor. Therefore, an application
was moved before the NCLT under sub-section (5) of Section 60 of the
IBC by the first respondent seeking a direction to the second
respondent to admit the first respondent's claim as a financial creditor.
During the pendency of the said application before the NCLT, the
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Committee of Creditors approved a resolution plan submitted by M/s.

Kals Distilleries Pvt. Ltd. The second respondent applied to the NCLT to
th
approve the resolution plan based on the approval. On 18 January
2021, the NCLT rejected the application made by the first respondent.
Aggrieved by the said order, the first respondent preferred an appeal
before the NCLAT. By the impugned judgment and order dated 7th
October 2021, the NCLAT held that the first respondent was a financial
th
creditor and not an operational creditor. The NCLT, on 13 October
2021 approved the resolution plan of M/s. Kals Distilleries Pvt. Ltd.
(Respondent no. 6 in Civil Appeal nos. 6991-6994 of 2022) in the CIRP
of the corporate debtor.
4. In Civil Appeal nos. 6991-6994 of 2022, the second respondent is
the resolution professional. The corporate debtor is the same as in the
other appeal. The fifth respondent had provided financial assistance to
the corporate debtor of Rs. 75,00,000/-. The fourth respondent
provided financial assistance to the corporate debtor of Rs.
1,62,00,000/-. The first respondent advanced a sum of Rs. 25,00,000/-
to the corporate debtor. The third respondent advanced a sum of Rs.
1,00,000/- to the corporate debtor. The Resolution Professional rejected
the claims of the four creditors as financial creditors. Therefore, they
filed separate applications before the NCLT by invoking sub-section (5)
of Section 60 of the IBC. The NCLT rejected the applications. In the
appeals preferred by them before the NCLAT, the NCLAT allowed the
appeals by relying upon its judgment, which is the subject matter of
challenge in Civil Appeal no. 1143 of 2022.
SUBMISSIONS
5. The learned senior counsel appearing for the appellants in support
of Civil Appeal no. 1143 of 2022 submitted that the first respondent is
an operational creditor going by the agreements dated 1st April 2014
st
and 1 April 2015. The reason is that the agreements indicate that the
corporate debtor appointed the first respondent to render services to
promote the beer manufactured by the corporate debtor. He relied upon
the definition of “operational debt” under subsection (21) of Section 5
of the IBC. He submitted that both the agreements provided for paying
a minimum security deposit by the first respondent as a condition for
being appointed as Sales Promoter of the corporate debtor. He
submitted that there was no intention on the part of the corporate
debtor to avail any financial facility from the first respondent. He
submitted that the amount paid towards the security deposit is not the
money disbursed to the corporate debtor towards financial facilities
availed by the corporate debtor. He submitted that the security deposit
paid by the first respondent would not qualify as a financial debt
defined under sub-section (8) of Section 5 of the IBC. The learned
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senior counsel relied upon a decision of this Court in the case of Swiss
Ribbons Private Limited v. Union of India1. He also relied upon a
decision of this Court in the case of Pioneer Urban Land and
2
Infrastructure Ltd. v. Union of India . He submitted that the NCLAT was
unnecessarily impressed by the acknowledgement of liability and
booking of interest component towards the security deposit, despite the
fact that it cannot be given the overriding effect over the law. He relied
upon the decisions of this Court in the cases of Tuticorin Alkali
Chemicals & Fertilisers Ltd., Madras v. Commissioner of Income Tax,
Madras3 and Consolidated Construction Consortium Limited v. Hitro
4
Energy Solutions Private Limited . He submitted that booking or
payment of interest is not the only criterion for ascertaining whether
the debt is a financial debt. The learned senior counsel, therefore,
urged that the view taken by the NCLAT in the impugned judgment is
entirely fallacious. He submitted that the NCLAT has virtually rewritten
the concepts of financial and operational debts incorporated in the IBC.
6. On facts, the learned senior counsel submitted that the payment
of the security deposit by the first respondent is a condition precedent
for being appointed as a Sales Promoter of the corporate debtor. The
intent of the agreements is to appoint the first respondent as the Sales
Promoter and not to avail any financial facilities from the first
respondent. The amount paid by the first respondent does not
constitute financial facilities extended to the corporate debtor. There
was no intention to raise finance from the first respondent, who was
appointed as a Sales Promoter. The learned senior counsel also relied
upon the decisions of this court in the cases of Anuj Jain, Interim
Resolution Professional for Jaypee Infratech Limited v. Axis Bank
5
Limited , Phoenix ARC Private Limited v. Spade Financial Services
Limited6 and New Okhla Industrial Development Authority v. Anand
7
Sonbhadra . Lastly, it is submitted that in the case of an invoice
involving any transaction, the delay in payment attracts interest
liability. Therefore, the payment of interest is not the sole criterion for
ascertaining whether a debt is a financial debt. He would, thus, submit
that the appeals deserve to be allowed.
7. The learned senior counsel appearing for the first respondent
submitted that the true nature of the agreements will have to be
examined for deciding the nature of the debt. He pointed out several
factual aspects, including the corporate debtor's acknowledgement of
the liability of payment of interest on security deposit for the Financial
Years 2014-2015, 2015-2016, 2016-2017 and 2017-2018. The
corporate debtor deducted TDS on the interest payable to the first
respondent for three financial years. He submitted that the three
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criteria, namely, disbursal, time value of money and commercial effect

of borrowing, are satisfied in the case of the present transaction. He
also relied upon the decision of this Court in the case of Anuj Jain,
5
Interim Resolution Professional for Jaypee Infratech Limited . He
submitted that it was very clear from the terms of the agreement that
the money was repayable after a fixed tenure without a deduction or
provision for forfeiture. An interest @21% per annum was the
consideration for the time value of money. The learned counsel
submitted that the NCLAT was right in going into the issue of the true
nature and effect of the transaction reflected in the agreements.
Relying upon the decision of this Court in the case of Pioneer Urban
Land and Infrastructure Ltd.2, the learned counsel submitted that
clause (f) of sub-section (8) of Section 5 of the IBC is a “catch all” and
“residuary” provision which includes any transaction having the
commercial effect of borrowing and any transaction which is used as a
tool for raising finance.
8. The learned senior counsel submitted that the agreements
entered into were the tools for raising finance, and no actual services
have ever been rendered to the first respondent or other lenders.
Therefore, in view of the law laid down by this Court in the case of
8
V.E.A. Annamalai Chettiar v. S.V.V.S. Veerappa Chettiar , the true
effect of the transaction has been taken into consideration. It is pointed
out that the corporate debtor has established a practice of raising
finance through private entities in the garb of security deposit under
various services agreements. The learned counsel, therefore, submitted
that no fault can be found with the impugned judgment.
9. The learned counsel appearing for the second respondent-
Resolution Professional, supported the appellants by contending that
the money advanced by the first respondent cannot be categorised as a
financial debt. Therefore, the first respondent was an operational
creditor. He relied upon the definition of “operational debt” under
subsection (21) of Section 5 of the IBC. He submitted that the security
deposit was not meant to reorganize the corporate debtor's debts. He
submitted that the agreements are service agreements by which the
corporate debtor agreed to take services from the first respondent for
consideration. Therefore, the security deposit was obviously to ensure
the performance of the terms of the agreements by the first
respondent. He submitted that accounting treatment cannot override
the law and the definition of “operational debt” under the IBC. He
submitted that none of the ingredients of clauses (a) to (f) of sub-
section (8) of Section 5 are present in the case at hand. In this case,
there is no disbursal of debt. He submitted that there was no financial
contract between the corporate debtor and the first respondent. Lastly,
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th
he submitted that in view of the judgment dated 29 September 2018
of the NCLAT on an application filed by M/s. New View Consultants Pvt.
Ltd., the second respondent categorised the first respondent as
operational creditor. He would, therefore, submit that the view taken by
the NCLAT was not correct.
CONSIDERATION OF SUBMISSIONS ON THE CONCEPT OF
FINANCIAL AND OPERATIONAL DEBT
10. Sub-section (11) of Section 3 of the IBC defines ‘debt’, which
reads thus:
“3. In this Code, unless the context otherwise requires,-
.. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ..
(11) “debt” means a liability or obligation in respect of a claim
which is due from any person and includes a financial debt and
operational debt;
.. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .”
Thus, a debt has to be a liability or obligation in respect of a claim
that is due from any person. Sub-section (11) uses the words “means”
and “includes”. Financial debt and operational debt are included in the
definition of debt. Thus, financial debt or operational debt must arise
out of a liability or obligation in respect of a claim.
11. “Claim” is defined under sub-section (6) of Section 3 of the IBC,
which reads thus:
“3. In this Code, unless the context otherwise requires,-
.. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .
(6) “claim” means -
(a) a right to payment, whether or not such right is reduced to
judgment, fixed, disputed, undisputed, legal, equitable,
secured, or unsecured;
(b) right to remedy for breach of contract under any law for the
time being in force, if such breach gives rise to a right to
payment, whether or not such right is reduced to judgment,
fixed, matured, unmatured, disputed, undisputed, secured or
unsecured;
.. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. style="margin-left :
18pt; text-indent : 18pt;">.. .”
Clause (a) shows that every right to receive payment is a claim,
whether or not such right is reduced to a judgment. A right to receive
payment is a claim, even if disputed, undisputed, secured, or
unsecured. The right to receive payment can be either legal or
equitable. Clause (b) includes the right to remedy for a breach of
contract under any law for the time being in force. Thus, a liability or
obligation is not covered by the definition of “debt” unless it is in
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respect of a claim covered by sub-section (6) of Section 3 of the IBC.

12. Sub-section (8) of Section 5 of the IBC defines “financial debt”,
which reads thus:
“5. In this Part, unless the context otherwise requires,-
.. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ..
(8) “financial debt” means a debt alongwith interest, if any,
which is disbursed against the consideration for the time
value of money and includes-
(a) money borrowed against the payment of interest;
(b) any amount raised by acceptance under any acceptance credit
facility or its dematerialised equivalent;
(c) any amount raised pursuant to any note purchase facility or
the issue of bonds, notes, debentures, loan stock or any similar
instrument;
(d) the amount of any liability in respect of any lease or hire
purchase contract which is deemed as a finance or capital lease
under the Indian Accounting Standards or such other
accounting standards as may be prescribed;
(e) receivables sold or discounted other than any receivables sold
on non-recourse basis;
(f) any amount raised under any other transaction,
including any forward sale or purchase agreement,
having the commercial effect of a borrowing;
[Explanation. -For the purposes of this sub-clause,-
(i) any amount raised from an allottee under a real estate
project shall be deemed to be an amount having the
commercial effect of a borrowing; and
(ii) the expressions, “allottee” and “real estate project” shall
have the meanings respectively assigned to them in clauses
(d) and (zn) of section 2 of the Real Estate (Regulation and
Development) Act, 2016 (16 of 2016);]
(g) any derivative transaction entered into in connection with
protection against or benefit from fluctuation in any rate or
price and for calculating the value of any derivative transaction,
only the market value of such transaction shall be taken into
account;
(h) any counter-indemnity obligation in respect of a guarantee,
indemnity, bond, documentary letter of credit or any other
instrument issued by a bank or financial institution;
(i) the amount of any liability in respect of any of the guarantee or
indemnity for any of the items referred to in sub-clause (a) to
(h) of this clause.”
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(emphasis added)
The definition incorporates the expression “means and includes”. The
first part of the definition, which starts with the word “means”, provides
that there has to be a debt along with interest, if any, which is
disbursed against the consideration for the time value of money. The
word “and” appears after the word “money”. Before the words “and
includes”, the legislature has not incorporated a comma. After the word
“includes”, the legislature has incorporated categories (a) to (i) of
financial debts. Hence, the cases covered by categories (a) to (i) must
satisfy the test laid down by the earlier part of the sub-section (8). The
test laid down therein is that there has to be a debt along with interest,
if any, and it must be disbursed against the consideration for the time
value of money. This Court had an occasion to deal with the definition
of “financial debt” in its various decisions. The first decision is in the
case of Anuj Jain, Interim Resolution Professional for Jaypee Infratech
Limited5. Paragraphs 46 to 50 read thus:
“The essentials for financial debt and financial creditor
46. Applying the aforementioned fundamental principles to the
definition occurring in Section 5(8) of the Code, we have not an iota
of doubt that for a debt to become “financial debt” for the purpose of
Part II of the Code, the basic elements are that it ought to be a
disbursal against the consideration for time value of money. It may
include any of the methods for raising money or incurring liability by
the modes prescribed in clauses (a) to (f) of Section 5(8); it may
also include any derivative transaction or counter-indemnity
obligation as per clauses (g) and (h) of Section 5(8); and it may also
be the amount of any liability in respect of any of the guarantee or
indemnity for any of the items referred to in clauses (a) to (h). The
requirement of existence of a debt, which is disbursed against
the consideration for the time value of money, in our view,
remains an essential part even in respect of any of the
transactions/dealings stated in clauses (a) to (i) of Section 5
(8), even if it is not necessarily stated therein. In any case, the
definition, by its very frame, cannot be read so expansive, rather
infinitely wide, that the root requirements of “disbursement” against
“the consideration for the time value of money” could be forsaken in
the manner that any transaction could stand alone to become a
financial debt. In other words, any of the transactions stated in
the said clauses (a) to (i) of Section 5(8) would be falling
within the ambit of “financial debt” only if it carries the
essential elements stated in the principal clause or at least
has the features which could be traced to such essential
elements in the principal clause. In yet other words, the
essential element of disbursal, and that too against the
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consideration for time value of money, needs to be found in

the genesis of any debt before it may be treated as “financial
debt” within the meaning of Section 5(8) of the Code. This
debt may be of any nature but a part of it is always required to be
carrying, or corresponding to, or at least having some traces of
disbursal against consideration for the time value of money.
47. As noticed, the root requirement for a creditor to become
financial creditor for the purpose of Part II of the Code, there must
be a financial debt which is owed to that person. He may be the
principal creditor to whom the financial debt is owed or he may be
an assignee in terms of extended meaning of this definition but, and
nevertheless, the requirement of existence of a debt being owed is
not forsaken.
48. It is also evident that what is being dealt with and described
in Section 5(7) and in Section 5(8) is the transaction vis-à-vis the
corporate debtor. Therefore, for a person to be designated as a
financial creditor of the corporate debtor, it has to be shown that the
corporate debtor owes a financial debt to such person. Understood
this way, it becomes clear that a third party to whom the corporate
debtor does not owe a financial debt cannot become its financial
creditor for the purpose of Part II of the Code.
49. Expounding yet further, in our view, the peculiar elements of
these expressions “financial creditor” and “financial debt”, as
occurring in Sections 5(7) and 5(8), when visualised and compared
with the generic expressions “creditor” and “debt” respectively, as
occurring in Sections 3(10) and 3(11) of the Code, the scheme of
things envisaged by the Code becomes clearer. The generic term
“creditor” is defined to mean any person to whom the debt is owed
and then, it has also been made clear that it includes a “financial
creditor”, a “secured creditor”, an “unsecured creditor”, an
“operational creditor”, and a “decree-holder”. Similarly, a “debt”
means a liability or obligation in respect of a claim which is due from
any person and this expression has also been given an extended
meaning to include a “financial debt” and an “operational debt”.
49.1. The use of the expression “means and includes” in
these clauses, on the very same principles of interpretation as
indicated above, makes it clear that for a person to become a
creditor, there has to be a debt i.e. a liability or obligation in
respect of a claim which may be due from any person. A
“secured creditor” in terms of Section 3(30) means a creditor in
whose favour a security interest is created; and “security interest”,
in terms of Section 3(31), means a right, title or interest or claim of
property created in favour of or provided for a secured creditor by a
transaction which secures payment for the purpose of an obligation
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and it includes, amongst others, a mortgage. Thus, any mortgage

created in favour of a creditor leads to a security interest being
created and thereby, the creditor becomes a secured creditor.
However, when all the defining clauses are read together and
harmoniously, it is clear that the legislature has maintained a
distinction amongst the expressions “financial creditor”, “operational
creditor”, “secured creditor” and “unsecured creditor”. Every secured
creditor would be a creditor; and every financial creditor would also
be a creditor but every secured creditor may not be a financial
creditor. As noticed, the expressions “financial debt” and “financial
creditor”, having their specific and distinct connotations and roles in
insolvency and liquidation process of corporate persons, have only
been defined in Part II whereas the expressions “secured creditor”
and “security interest” are defined in Part I.
50. A conjoint reading of the statutory provisions with the
enunciation of this Court in Swiss Ribbons [Swiss Ribbons (P) Ltd. v.
Union of India, (2019) 4 SCC 17], leaves nothing to doubt that in
the scheme of the IBC, what is intended by the expression “financial
creditor” is a person who has direct engagement in the functioning of
the corporate debtor; who is involved right from the beginning while
assessing the viability of the corporate debtor; who would engage in
restructuring of the loan as well as in reorganisation of the corporate
debtor's business when there is financial stress. In other words, the
financial creditor, by its own direct involvement in a functional
existence of corporate debtor, acquires unique position, who could be
entrusted with the task of ensuring the sustenance and growth of
the corporate debtor, akin to that of a guardian. In the context of
insolvency resolution process, this class of stakeholders, namely,
financial creditors, is entrusted by the legislature with such a role
that it would look forward to ensure that the corporate debtor is
rejuvenated and gets back to its wheels with reasonable capacity of
repaying its debts and to attend on its other obligations. Protection
of the rights of all other stakeholders, including other creditors,
would obviously be concomitant of such resurgence of the corporate
debtor.
50.1. Keeping the objectives of the Code in view, the position and
role of a person having only security interest over the assets of the
corporate debtor could easily be contrasted with the role of a
financial creditor because the former shall have only the interest of
realising the value of its security (there being no other stakes
involved and least any stake in the corporate debtor's growth or
equitable liquidation) while the latter would, apart from looking at
safeguards of its own interests, would also and simultaneously be
interested in rejuvenation, revival and growth of the corporate
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debtor. Thus understood, it is clear that if the former i.e. a person

having only security interest over the assets of the corporate debtor
is also included as a financial creditor and thereby allowed to have
its say in the processes contemplated by Part II of the Code, the
growth and revival of the corporate debtor may be the casualty.
Such result would defeat the very objective and purpose of the Code,
particularly of the provisions aimed at corporate insolvency
resolution.
50.2. Therefore, we have no hesitation in saying that a person
having only security interest over the assets of corporate debtor (like
the instant third-party securities), even if falling within the
description of “secured creditor” by virtue of collateral security
extended by the corporate debtor, would nevertheless stand outside
the sect of “financial creditors” as per the definitions contained in
sub-sections (7) and (8) of Section 5 of the Code. Differently put, if
a corporate debtor has given its property in mortgage to secure the
debts of a third party, it may lead to a mortgage debt and, therefore,
it may fall within the definition of “debt” under Section 3(10) of the
Code. However, it would remain a debt alone and cannot partake the
character of a “financial debt” within the meaning of Section 5(8) of
the Code.”
(emphasis added)
A Bench of three Hon'ble Judges of this Court in the case of Phoenix
6
ARC Private Limited dealt with the issue in greater detail. It also dealt
with the concept of the time value of money. In paragraphs 44 to 47 of
the said decision, this Court held thus:
“44. Section 5(8) IBC provides a definition of “financial debt” in
the following terms:
XXX XXX XXX
G.3.2. Financial creditor and financial debt
45. Under Section 5(7) IBC, a person can be categorised as a
financial creditor if a financial debt is owed to it. Section 5(8) IBC
stipulates that the essential ingredient of a financial debt is disbursal
against consideration for the time value of money. This Court,
speaking through Rohinton F. Nariman, J., in Swiss Ribbons (P) Ltd.
v. Union of India [Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4
SCC 17] has held : (SCC p. 64, para 42)
“42. A perusal of the definition of “financial creditor” and
“financial debt” makes it clear that a financial debt is a debt
together with interest, if any, which is disbursed against the
consideration for time value of money. It may further be money
that is borrowed or raised in any of the manners prescribed in
Section 5(8) or otherwise, as Section 5(8) is an inclusive
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definition. On the other hand, an “operational debt” would include

a claim in respect of the provision of goods or services, including
employment, or a debt in respect of payment of dues arising
under any law and payable to the Government or any local
authority.”
(emphasis supplied)
46. In this context, it would be relevant to discuss the meaning of
the terms “disburse” and “time value of money” used in the principal
clause of Section 5(8) IBC. This Court has interpreted the term
“disbursal” in Pioneer Urban Land & Infrastructure Ltd. v. Union of
India [Pioneer Urban Land & Infrastructure Ltd. v. Union of India,
(2019) 8 SCC 416 : (2019) 4 SCC (Civ) 1] in the following terms :
(SCC p. 511, paras 70-71)
“70. The definition of “financial debt” in Section 5(8) then goes
on to state that a “debt” must be “disbursed” against the
consideration for time value of money. “Disbursement” is defined
th
in Black's Law Dictionary (10 Edn.) to mean:
‘1. The act of paying out money, commonly from a fund or in
settlement of a debt or account payable. 2. The money so paid;
an amount of money given for a particular purpose.’
71. In the present context, it is clear that the expression
“disburse” would refer to the payment of instalments by the
allottee to the real estate developer for the particular purpose of
funding the real estate project in which the allottee is to be
allotted a flat/apartment. The expression “disbursed” refers to
money which has been paid against consideration for the “time
value of money”. In short, the “disbursal” must be money and
must be against consideration for the “time value of money”,
meaning thereby, the fact that such money is now no longer with
the lender, but is with the borrower, who then utilises the
money.”
47. The report of the Insolvency Law Committee dated 26-3-2018
has discussed the interpretation of the term “time value of money”
and stated:
“1.4. The current definition of “financial debt” under Section 5
(8) of the Code uses the words “[Ed. : The matter between two
asterisks has been emphasised in original.] includes [Ed. : The
matter between two asterisks has been emphasised in original.]”,
thus the kinds of financial debts illustrated are not exhaustive.
The phrase “[Ed. : The matter between two asterisks has been
emphasised in original.] disbursed against the consideration for
the time value of money [Ed. : The matter between two asterisks
has been emphasised in original.]” has been the subject of
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interpretation only in a handful of cases under the Code. The

words “time value” have been interpreted to mean
compensation or the price paid for the length of time for
which the money has been disbursed. This may be in the
form of interest paid on the money, or factoring of a
discount in the payment.”
(emphasis added)”
In the case of Pioneer Urban Land and Infrastructure Ltd.2, this issue
was dealt with in paragraphs 76 and 77, which read thus:
“76. Sub-clause (f) Section 5(8) thus read would subsume
within it amounts raised under transactions which are not
necessarily loan transactions, so long as they have the
commercial effect of a borrowing. We were referred to Collins
English Dictionary & Thesaurus (2nd Edn., 2000) for the meaning of
the expression “borrow” and the meaning of the expression
“commercial”. They are set out hereinbelow:
“borrow.—vb 1. to obtain or receive (something, such as
money) on loan for temporary use, intending to give it, or
something equivalent back to the lender. 2. to adopt (ideas,
words, etc.) from another source; appropriate. 3. Not standard. to
lend. 4. (intr) Golf. To putt the ball uphill of the direct path to the
hole : make sure you borrow enough.”
***
“commercial.—adj. 1. of or engaged in commerce. 2. sponsored
or paid for by an advertiser : commercial television. 3. having
profit as the main aim : commercial music. 4.(of chemicals, etc.)
unrefined and produced in bulk for use in industry. 5. a
commercially sponsored advertisement on radio or television.”
77. A perusal of these definitions would show that even though
the petitioners may be right in stating that a “borrowing” is a loan of
money for temporary use, they are not necessarily right in stating
that the transaction must culminate in money being given back to
the lender. The expression “borrow” is wide enough to include an
advance given by the homebuyers to a real estate developer for
“temporary use” i.e. for use in the construction project so long as it
is intended by the agreement to give “something equivalent” to
money back to the homebuyers. The “something equivalent” in these
matters is obviously the flat/apartment. Also of importance is the
expression “commercial effect”. “Commercial” would
generally involve transactions having profit as their main aim.
Piecing the threads together, therefore, so long as an amount is
“raised” under a real estate agreement, which is done with profit as
the main aim, such amount would be subsumed within Section 5(8)
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(f) as the sale agreement between developer and home buyer would
have the “commercial effect” of a borrowing, in that, money is paid
in advance for temporary use so that a flat/apartment is given back
to the lender. Both parties have “commercial” interests in the
same—the real estate developer seeking to make a profit on the sale
of the apartment, and the flat/apartment purchaser profiting by the
sale of the apartment. Thus construed, there can be no difficulty in
stating that the amounts raised from allottees under real estate
projects would, in fact, be subsumed within Section 5(8)(f) even
without adverting to the Explanation introduced by the Amendment
Act.”
(emphasis added)
FINDINGS ON FACTUAL ASPECTS
13. In light of the interpretation put by this Court to the definition of
financial debt, it is necessary to come back to the facts of the case. The
relevant agreements for our consideration are in the form of letters
dated 1st April 2014 and 1st April 2015. The corporate debtor addressed
the letters to the first respondent. The relevant part of the
st
agreement/letter dated 1 April 2014 reads thus:
“.. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ..
SACH MARKETING PVT LTD
JHARKHAND
Dear Sir,
We are pleased to appoint you as our SALES PROMOTER for
promotion of Beer at Ranchi (Jharkhand) on the following terms and
conditions:
1. You will be allowed Rs. 4,000/- per month for your
promote work.
2. You will be working in close coordination with company's
Marketing Manager for the aforementioned area, who shall
convey the instructions in writing to you.
3. The selling rates of our beer shall be decided by the company
from time to time and you will not change them without prior
confirmation from the company. Further, you shall not commit
to any party about any rebate or any discount etc without prior
authorization from us.
4. The appointment shall be w.e.f. 1st April, 2014 for a period of
st
12 months ending 31 March, 2015.
5. The settlement of commission as stated above in point no. 1
shall be on quarterly basis.
6. Notwithstanding anything provided above this appointment in
terms hereof may be terminated by us during the term of
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appointment aforesaid by giving to you thirty days notice in

writing in this behalf from the date of dispatch of notice.
7. You shall not be entitled upon termination of this agreement or
appointment within the terms hereof to claim any damages or
compensation from the company for such termination or
consequent thereupon or otherwise relative thereto against the
other.
8. Forthwith upon determination of this agreement appointment
you shall cease all dealings on behalf of the company and shall
deliver custody of all premises, stock, cash negotiable
instruments, papers and documents and other items and
things of the company coming into the custody of these
presents.
9. The company reserve the right to appoint any, other party as
Sales Promoter for, areas mentioned above.
10. You have to deposit minimum security of Rs.
53,15,000/- with the Company which will carry interest
@21% p.a. We will provide you interest on Rs. 7,85,850/
- @21% per annum.
Please acknowledge receipt and as a token of your acceptance of
above terms conditions.
Please sign duplicate copy of this letter and return the same to us
for our records.
Thanking you,
.. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .”
(emphasis added)
As seen from clause (4), the agreement was only for twelve months
ending on 31st March 2015. Therefore, on 1st April 2015, another letter
was issued by the corporate debtor to the first respondent,
incorporating identical terms and conditions. The only difference is that
st
the agreement's duration was up to 31 March 2016. Clause (10) of the
st
agreement/letter dated 1 April 2015 reads thus:
“.. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ..
#10 You have to deposit minimum security of Rs. 53,15,000/-
with the Company which will carry interest @21% per annum.
We will provide you interest on Rs. 32,85,850/- @21% per
annum. Please acknowledge receipt and as a token of your
acceptance of above terms and conditions.
.. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .”
14. Where one party owes a debt to another and when the creditor is
claiming under a written agreement/arrangement providing for
rendering ‘service’, the debt is an operational debt only if the claim
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subject matter of the debt has some connection or co-relation with the
‘service’ subject matter of the transaction. The written document
cannot be taken for its face value. Therefore, it is necessary to
determine the real nature of the transaction on a plain reading of the
agreements. What is surprising is that for acting as a Sales Promoter of
the beer manufactured by a corporate debtor, only a sum of Rs. 4,000/-
per month was made payable to the first respondent. Apart from the
sum of Rs. 4,000/- per month, there is no commission payable to the
first respondent on the quantity of sales. Clause (6) provides for
termination of the appointment by giving thirty days' notice. Though
clause (10) provides for the payment of the security deposit by the first
respondent, it is pertinent to note that there is no clause for the
forfeiture of the security deposit. The amount specified in clause (10)
has no correlation whatsoever with the performance of the other
conditions of the contract by the first respondent. As there is no clause
regarding forfeiture of the security deposit or part thereof, the corporate
debtor was liable to refund the security deposit after the period
specified therein was over with interest @21% per annum. Since the
security deposit payment had no correlation with any other clause
under the agreements, as held by the NCLAT, the security deposit
amounts represent debts covered by subsection (11) of Section 3 of the
IBC. The reason is that the right of the first respondent to seek a refund
of the security deposit with interest is a claim within the meaning of
subsection (6) of Section 3 of the IBC as the first respondent is seeking
a right to payment of the deposit amount with interest. Therefore, there
is no manner of doubt that there is a debt in the form of a security
deposit mentioned in the said two agreements.
15. Sub-section (21) of Section 5 defines “operational debt”, which
reads thus:
“5. In this Part, unless the context otherwise requires,-
.. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ..
(21) “operational debt” means a claim in respect of the provision
of goods or services including employment or a debt in respect of the
payment of dues arising under any law for the time being in force
and payable to the Central Government, any State Government or
any local authority;
.. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .”
The second part of the definition which deals with the payment of
dues arising under any law, will not apply. However, for the
applicability of the first part, the claim must be concerning the
provisions of goods or services. Therefore, in the case of a contract of
service, there must be a correlation between the service as agreed to
be provided under the agreement and the claim. The reason is that the
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definition uses the phraseology “a claim in respect of the provision of

goods or services”. Assuming that both the agreements are genuine in
the sense that they reflect the true nature of the transaction, the only
claim under the agreements which will have any connection with the
services rendered by the first respondent will be the claim of Rs. 4,000/
- per month as provided in clause (1) of both the agreements. Only this
claim can be said to be concerning the provision of services. Therefore,
by no stretch of imagination, the debt claimed by the first respondent
can be an operational debt. We are conscious of the fact that the
provision for payment of interest by the corporate debtor by itself is not
the only material factor in deciding the nature of the debt. But, in the
facts of the case, the payment of the amount mentioned in clause (10)
of the letter has no relation with the service supposed to be rendered
by the first respondent.
16. Now, coming back to the definition of a financial debt under sub-
section (8) of Section 5 of the IBC, in the facts of the case, there is no
doubt that there is a debt with interest @21% per annum. The
provision made for interest payment shows that it represents
consideration for the time value of money. Now, we come to clause (f)
of sub-section (8) of Section 5 of the IBC. The first condition of
applicability of clause (f) is that the amount must be raised under any
other transaction. Any other transaction means a transaction which is
not covered by clauses (a) to (e). Clause (f) covers all those
transactions not covered by any of these sub-clauses of sub-section (8)
that satisfy the test in the first part of Section 8. The condition for the
applicability of clause (f) is that the transaction must have the
commercial effect of borrowing. “Transaction” has been defined in sub-
section (33) of Section 3 of the IBC, which includes an agreement or
arrangement in writing for the transfer of assets, funds, goods, etc.,
from or to the corporate debtor. In this case, there is an arrangement in
writing for the transfer of funds to the corporate debtor. Therefore, the
first condition incorporated in clause (f) is fulfilled.
17. To decide whether the second condition had been fulfilled, it is
necessary to refer to the factual findings recorded in the impugned
judgment. The NCLAT has referred to the letter dated 26th October
2017 addressed by the corporate debtor to the first respondent. We
have perused a copy of the said letter annexed to the counter. By the
said letter, the corporate debtor informed the first respondent that for
the year 2016-2017, the corporate debtor had provided the interest
amounting to Rs. 18,06,000/- in the books of the corporate debtor and
that the sum will be credited to the account of the first respondent on
the date of payment of TDS. In paragraph 21 of the impugned
judgment, it is held that the financial statement of the first respondent
for the Financial Year 2017-2018 shows revenue from the interest on
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the security deposit. It is also held that the amounts were treated as
long-term loans and advances in the financial statement of the
corporate debtor for the Financial Year 2015-2016. Moreover, in the
financial statement of the corporate debtor for the Financial Year 2016-
2017, the amounts paid by the first respondent were shown as “other
long-term liabilities”. Therefore, if the letter mentioned above and the
financial statements of the corporate debtor are considered, it is
evident that the amount raised under the said two agreements has the
commercial effect of borrowing as the corporate debtor treated the said
amount as borrowed from the first respondent.
CONCLUSION
18. Therefore, we have no hesitation in concurring with the NCLAT's
view that the amounts covered by security deposits under the
agreements constitute financial debt. As it is a financial debt owed by
the first respondent, sub-section (7) of Section 5 of the IBC makes the
first respondent a financial creditor.
19. The contracts subject matter of the Civil Appeal Nos. 6991 to
6994 of 2022 are in the form of letters, which provide for similar
clauses as in the case of agreements subject matter of Civil Appeal No.
1143 of 2022.
SUMMARY
20. Subject to what is held above, we summarize our legal
conclusions:
a. There cannot be a debt within the meaning of subsection (11) of
section 5 of the IB Code unless there is a claim within the
meaning of sub-section (6) of section 5 of thereof;
b. The test to determine whether a debt is a financial debt within the
meaning of sub-section (8) of section 5 is the existence of a debt
along with interest, if any, which is disbursed against the
consideration for the time value of money. The cases covered by
categories (a) to (i) of sub-section (8) must satisfy the said test
laid down by the earlier part of sub-section (8) of section 5;
c. While deciding the issue of whether a debt is a financial debt or an
operational debt arising out of a transaction covered by an
agreement or arrangement in writing, it is necessary to ascertain
what is the real nature of the transaction reflected in the writing;
and
d. Where one party owes a debt to another and when the creditor is
claiming under a written agreement/arrangement providing for
rendering ‘service’, the debt is an operational debt only if the
claim subject matter of the debt has some connection or co-
relation with the ‘service’ subject matter of the transaction.
OPERATIVE PART
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21. For the reasons recorded earlier, we hold that the view taken by
the NCLAT under the impugned judgments and orders is correct and
will have to be upheld. Therefore, we confirm the impugned judgments
and dismiss the appeals with no order as to costs. The Resolution
Professional shall continue with the CIRP process in accordance with the
impugned judgments.
———
1
(2019) 4 SCC 17

2
(2019) 8 SCC 416

3
(1997) 6 SCC 117

4
(2022) 7 SCC 164

5
(2020) 8 SCC 401

6
(2021) 3 SCC 475

7
(2023) 1 SCC 724

8
(1952) 2 SCC 668 : AIR 1956 SC 12

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