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Untangling legal knot: SC’s ruling on “security deposits” as financial or operational debt under IBC


For initiating proceedings under the Insolvency and Bankruptcy Code 2016 (“IBC”), categorisation of a creditor as either a “financial creditor” or an “operational creditor” is a rather significant first step. Such categorisation is not merely organisational, but essential since the rights, obligations and procedural requirements for realisation of debt by financial and operational creditors also differ under the IBC.

The statute clearly defines the ambit and scope of ‘financial debt’ and ‘operational debt’, which is determinative of whether a creditor is a ‘financial creditor’ or an ‘operational creditor’ under the IBC, respectively. However, such categorisation is riddled with complexities as has been seen in certain peculiar class of creditors. On few occasions, the Supreme Court (“SC”) has been faced with the question of categorisation of creditors where the application of the given statutory definitions was not as straightforward.

For instance, in Pioneer Urban Land and Infrastructure Ltd. & Anr. v. UOI & Ors.[1] (“Pioneer”), the SC was faced with the issue of whether home buyers are financial or operational creditors under the IBC. The SC held that the amounts raised from home buyers contributes significantly to the financing of the construction of such flats/ apartments, and as such the money raised by developers from the home buyers is done with a profit-making motive and therefore, it has the commercial effect of borrowing. Thus, the SC held that ‘real estate allottees’, as defined under Section 2(d) of the Real Estate (Regulation and Development) Act, 2016 (“RERA”), fall within the ambit of ‘financial creditors’ under the IBC.

The issue of categorisation of local industrial development authorities also came to light, which was settled by the SC in New Okhla Industrial Development Authority v. Anand Sonbhadra[2], (“Noida Case”). It was held that disbursal of debt is an essential pre-condition for a transaction to be classified as a ‘financial debt’, and since, in the case of a lease, there is no disbursement of any debt or any sums by the lessor (i.e. Noida, in the given case) to the lessee (i.e. the corporate debtor), the same cannot give rise to a ‘financial debt’. Thus, the New Okhla Industrial Development Authority was classified as an operational creditor in the aforesaid case.

Once again, the Supreme Court in M/s Consolidated Construction Consortium Limited v. M/s Hitro Energy Solutions Private Limited[3] (“C3 v. Hitro”) adjudicated on the issue of whether the claim for refund of an advance amount against a corporate debtor would tantamount to an ‘operational debt’ under the IBC. The SC held that such a creditor is entitled to reimbursement of the advance amount in its capacity as an ‘operational creditor’. The SC also observed that for a debt to be classified as an ‘operational debt’, it must bear some nexus with the provision of goods or services, without specifying who is to be the supplier or the receiver of such goods or services.

Another question that arose is whether home buyers who are the beneficiaries of a decree are distinct from other home buyers, and are thus a separate class of creditors from ‘financial creditors’ and ‘operational creditors.’ The SC in Vishal Chelani & others vs Debashis Nanda[4], held that home buyers who are decree-holders would be recognised as financial creditors as there cannot be further classification in a class of creditors, and that home buyers should not be classified as ‘other creditor’ merely because they have decided to exercise their legal rights and remedies available under law and obtained a decree of refund in their favour from RERA.

Interestingly, the SC in its recent ruling in Global Credit Capital Limited & Anr. v. Sach Marketing Pvt. Ltd. & Anr.[5] (“GCCL Case”) againdelved into the question of categorisation of financial and operational creditors under the IBC in determining the nature of “security deposits” and laid down certain parameters, which are elucidated below.

Factual Matrix

By way of two agreements/ letters dated April 1, 2014, and April 1, 2015, the Corporate Debtor appointed Respondent No.1 as a ‘Sales Promoter’ to promote beer manufactured by the Corporate Debtor at Ranchi (Jharkhand), for twelve months, under each agreement. The letter stated that Respondent No.1 will be given INR 4000/- per month to “promote work”. One of the conditions incorporated by the Corporate Debtor in the said letter/ agreement was that Respondent No.1 should deposit a minimum security of INR 53,15,000/- with the Corporate Debtor, which will carry interest @21% per annum. The letter provided that the Corporate Debtor will pay interest on INR 7,85,850/- @21% per annum. The terms of the agreement/ letter dated April 1, 2015, were identical, the only difference being that under the second agreement/ letter, the Corporate Debtor was to pay interest on INR 32,85,850/- @21% per annum.

Respondent No.1 filed a claim as a financial creditor, which was rejected by the Resolution Professional. An application was filed before the National Company Law Tribunal (NCLT) under Section 60(5) of the IBC, seeking direction to admit the claim as financial debt, which was also rejected. Thereafter, in appeal filed before the National Company Law Appellate Tribunal (NCLAT), the court held that Respondent No.1 was a financial creditor. This order of the NCLAT was challenged before the SC. This case is the subject of the present article. 


A perusal of the relevant definitions under the IBC is warranted to appreciate the findings of the SC in the GCCL Case:

(20) “operational creditor” means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred”

(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”

(7) financial creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to”

(8) financial debt” means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes –

(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;…”

Essential elements of ‘financial debt’

The Supreme Court in the landmark cases of Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited[6] (“Jaypee”) and Phoenix ARC Private Limited v. Spade Financial Services Limited & Ors.[7] (“Phoenix ARC”) has analysed the definition of ‘financial debt’ at length and held that the root requirement for a creditor to become a financial creditor is:

  • It has to be shown that the corporate debtor owes a ‘financial debt’ to such person claiming to be a ‘financial creditor’ to the corporate debtor.
  • Such person may be the principal creditor to whom the financial debt is owed or he may be an assignee in terms of the extended meaning of this definition but, nonetheless, the requirement of existence of a ‘debt’ being owed is not forsaken.
  • The essential element of “disbursal”, and that too “against the 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 IBC.
  • 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.

Further, any of the transactions stated in clauses (a) to (i) of Section 5(8) of the IBC would be falling within the ambit of ‘financial debt’ only if it carries the essential elements stated in the principal clause (as elaborated above, from (a) to (d)), or at least has features that could be traced to such essential elements in the principal clause.

Further, the SC in Phoenix ARC judgment dealt with the concept of “time value of money” in greater detail and while drawing reference from the report of the Insolvency Law Committee dated March 26, 2018, held that the words “time value” 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.

Commercial effect of borrowing

SC has relied upon its judgment in Pioneer to emphasise that sub-clause (f) of Section 5(8) of the
IBC 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”.

SC held that while “borrowing” is a loan of money for temporary use, it is not necessary 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 home buyers 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 home buyers, which in real estate matters  means a flat or an apartment.

SC has also observed that the expression “commercial effect” is also of significance as the term “commercial” would generally involve transactions having profit as their main aim.

Findings of the SC in GCCL Case

In the given facts and circumstances, the SC held that (i) only the provision for payment of INR 4000/- per month to “promote work” is an operational debt, since such claim has direct co-relation with service being rendered under the agreement/ letter, and that (ii) the provision on deposit of security and interest thereon is a financial debt, since such claim for security deposit has no correlation with service being rendered under the agreement/ letter.

The SC also observed certain peculiar facts of the case, where:

  • Only a mere sum of INR 4,000/- per month was payable to Respondent No.1 for the services rendered; and that there is no commission payable on the quantity of sales.
  • In the provision for payment of security deposit, there is no clause for forfeiture of the security deposit, thus making the Corporate Debtor liable to refund of the security deposit, along with interest, after the period specified therein.

Consequently, the SC has held that the real nature of the transaction must be determined before categorising the debt as financial or operational debt. Accordingly, the SC held that (i) the security deposit amount represents debt covered by sub-section (11) of Section 3 of the IBC, and (ii) the right of Respondent No.1 to seek refund of the security deposit with interest is a claim within the meaning of subsection (6) of Section 3 of the IBC.

The SC held that the security deposit is a financial debt, being covered under sub-section (f) of Section 5(8) of the IBC, since the given debt satisfies the following pre-requisites of such sub-section (f):

  • The debt is not covered by any of the sub-clauses (a) to (e) of Section 5(8).
  • The amount raised is under a “transaction”, as defined in Section 3(33) of the IBC (in the given case, there is an arrangement in writing for the transfer of funds to the Corporate Debtor.)
  • Such transaction must have the commercial effect of borrowing (in the given case, the provision for interest payment shows that it represents consideration for the time value of money).

While making these observations, the SC was 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. Hence, the SC also perused through the following facts to determine the nature of the debt as ‘financial debt’:

  • the financial statement of Respondent No.1 for Financial Year 2017-18 shows revenue from interest on the security deposit;
  • in the financial statement of the Corporate Debtor for Financial Year 2015-16 and 2016-17, the amounts were treated as (i) long-term loans and advances, and (ii) “other long-term liabilities”, respectively;
  • In a letter dated October 26, 2017, the Corporate Debtor had informed Respondent No.1 that for the year 2016-17, the Corporate Debtor had provided interest amounting to INR 18,06,000/- in the books of the corporate debtor and that the sum will be credited to the account of Respondent No.1 on the date of payment of TDS.

In view of the afore-stated facts, the SC conclusively held that the amounts raised, by way of deposit of security, under the said two agreements have the commercial effect of borrowing as the Corporate Debtor treated the said amounts as borrowed from Respondent No.1. Thus, such amounts constitute ‘financial debt’.

Accordingly, the SC has summarised the following key parameters to be considered in determining the nature of debt for the purposes of the IBC:

  • There cannot be a debt within the meaning of sub-section (11) of Section 5 of the IBC unless there is a claim within the meaning of sub-section (6) of Section 5;
  • 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;
  • It is necessary to determine the real nature of the transaction, reflected in the writing, on a plain reading of the agreements. The written document cannot be taken at its face value while determining the nature of debt;
  • where one party owes a debt to a creditor who is claiming under a written agreement/ arrangement providing for rendering ‘service’, the debt will become 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.


SC has yet again adopted a contextual and purposive interpretation of the statutory definitions and has emphasised on looking at the real nature of the transaction underlying the written agreement, before categorising a debt as financial or operational under the IBC. The judgment reinforces the significance of purposive interpretation, especially in commercial litigations. It also makes it amply clear that the twin test of “time value of money” and “commercial effect of borrowing” cannot and ought not to be interpreted in a mechanical manner.

However, even with such conclusive parameters and observations, as laid down in this case, the determination of the nature of debt will depend upon the peculiar facts and circumstances of each case, even if it means that some claims arising from a single agreement may constitute ‘financial debt’, while others may constitute ‘operational debt’.

[1] (2019) 8 SCC 416

[2] (2023) 1 SCC 724

[3] (2022) 7 SCC 164

[4] (2024) 242 Comp Cas 267

[5] Civil Appeal No. 1143 of 2022 (decided on April 25, 2024).  

[6] (2020) 8 SCC 401

[7] (2021) 3 SCC 475