Case Note & Summary
The Supreme Court allowed appeals against NCLAT judgments that classified security deposits paid by sales promoters as financial debts under the Insolvency and Bankruptcy Code, 2016 (IBC). The corporate debtor, M/s. Mount Shivalik Industries Limited, had entered into service agreements with the first respondent in Civil Appeal No. 1143 of 2022, appointing it as a Sales Promoter for beer. The agreements required the first respondent to deposit a minimum security of Rs. 53,15,000/- (later Rs. 32,85,850/-) with the corporate debtor, carrying interest at 21% per annum. The Oriental Bank of Commerce initiated CIRP against the corporate debtor under Section 7 IBC. The first respondent initially filed a claim as an operational creditor but later withdrew it and filed as a financial creditor. The Resolution Professional rejected the claim, leading to an application under Section 60(5) IBC before the NCLT, which was dismissed. The NCLAT reversed, holding the first respondent to be a financial creditor. In connected appeals (Civil Appeal Nos. 6991-6994 of 2022), similar claims by four other creditors who advanced sums to the corporate debtor were also rejected by the NCLT but allowed by the NCLAT following its earlier judgment. The Supreme Court examined the definitions under Section 5(8) (financial debt) and Section 5(21) (operational debt) of the IBC. The appellants argued that the security deposit was a condition for appointment as Sales Promoter, not a financial facility, and thus an operational debt. The respondents contended that the deposit had the commercial effect of borrowing, evidenced by interest payments and TDS deductions. The Court held that the true nature of the transaction must be assessed: the deposit was a security for performance of services, not a disbursal against time value of money. The Court distinguished cases where deposits were used as a tool for raising finance, noting that here the primary purpose was service provision. The Court also held that accounting treatment (booking interest, deducting TDS) cannot override the statutory definition. Consequently, the Supreme Court set aside the NCLAT judgments, restored the NCLT orders, and held that the respondents are operational creditors, not financial creditors. The appeals were allowed.
Headnote
A) Insolvency and Bankruptcy Code - Financial Debt vs Operational Debt - Security Deposit under Service Agreement - Section 5(8), 5(21) IBC, 2016 - The issue was whether a security deposit paid by a sales promoter to a corporate debtor under a service agreement for promoting beer sales constitutes a financial debt. The Supreme Court held that such a deposit is not a financial debt as there is no disbursal against the time value of money or commercial effect of borrowing; it is a security for performance of services, thus an operational debt. The court emphasized that the true nature of the transaction, not accounting treatment, determines classification (Paras 1-20). B) Insolvency and Bankruptcy Code - Interpretation of Financial Debt - Disbursal and Time Value of Money - Section 5(8) IBC, 2016 - The court clarified that for a debt to be financial, there must be a disbursal of money against the time value of money. Mere payment of interest on a security deposit does not automatically make it a financial debt; the commercial intent of the parties must be examined. The court distinguished cases where deposits were used as a tool for raising finance (Paras 15-20). C) Insolvency and Bankruptcy Code - Operational Debt - Definition and Scope - Section 5(21) IBC, 2016 - The court reiterated that operational debt includes claims for goods or services, including employment. A security deposit paid under a service agreement is intrinsically linked to the provision of services and thus falls within operational debt. The court held that the NCLAT erred in reclassifying the deposit as financial debt (Paras 10-14).
Issue of Consideration
Whether a security deposit paid by a sales promoter under a service agreement constitutes a 'financial debt' within the meaning of Section 5(8) of the Insolvency and Bankruptcy Code, 2016, or an 'operational debt' under Section 5(21).
Final Decision
Appeals allowed. Impugned judgments of NCLAT set aside. NCLT orders restored. Respondents are operational creditors, not financial creditors.
Law Points
- Financial debt requires disbursal against time value of money
- Security deposit under service agreement is not financial debt
- Operational debt includes claims for services rendered
- Substance over form but intent of parties relevant
- Accounting treatment cannot override statutory definition
