Holding

A debt exists only if there is a claim under s.3(6), and a financial debt is one that involves disbursement against consideration for the time value of money; the security‑deposit amounts in the agreements satisfy this test, making the respondent a financial creditor.

Summary

The Supreme Court examined whether the security deposit amounts payable by a sales promoter under service agreements with Mount Shivalik Industries Ltd. constitute a financial debt or an operational debt under the Insolvency and Bankruptcy Code, 2016. The Court clarified that a "debt" exists only when there is a claim as defined in Section 3(6) and that a "financial debt" must involve a disbursement against consideration for the time value of money, with any category under Section 5(8) satisfying this test. It held that the security deposit, bearing interest at 21% and treated as a long‑term liability in the corporate debtor’s books, has the commercial effect of borrowing and therefore qualifies as a financial debt. Consequently, the respondent is a financial creditor under Section 5(7). The Court affirmed the NCLAT’s classification of the debt as financial and dismissed the appeals, allowing the CIRP to proceed as ordered.

Issues considered

Whether a debt exists within the meaning of sub‑section (11) of section 5 of the IBC absent a claim under sub‑section (6) of section 3
What is the test to determine a financial debt under sub‑section (8) of section 5 of the IBC
Whether the real nature of the transaction reflected in a written agreement must be ascertained to classify a debt as financial or operational
When a debt arising from a service agreement is to be treated as an operational debt

Legislation cited

Insolvency and Bankruptcy Code, 2016s. 14, s. 3(11), s. 3(6), s. 5(11), s. 5(21), s. 5(33), s. 5(7), s. 5(8), s. 60, s. 7

Subjects

sub-section (11) of section 5 of Insolvency and Bankruptcy Code, 2016sub-section (8) of section 5 of Insolvency and Bankruptcy Code, 2016Means and include in sub-section (8) of section 5 of Insolvency and Bankruptcy Code, 2016DebtFinancial debtOperational debtNature of transactionWritten agreementServiceDebt connection or co-relation with serviceTime value of money

Judgment

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

Global Credit Capital Limited & Anr.
v.
Sach Marketing Pvt. Ltd. & Anr
(Civil Appeal No. 1143 of 2022)
25 April 2024
[Abhay S. Oka* and Pankaj Mithal, JJ.]

Issue for Consideration
(i) Whether there can be debt within the meaning of sub-section
(11) of section 5 of the Insolvency and Bankruptcy Code, 2016;
(ii) What is the test to determine whether a debt is a financial debt
within the meaning of sub-section (8) of section 5 of the 2016
Code; (iii) Is it necessary to ascertain what is the real nature of
the transaction reflected in the writing, while deciding the issue
whether a debt is a financial debt or an operational debt; (iv) When
is the debt, an operational debt.

Headnotes
Insolvency and Bankruptcy Code, 2016 – Whether there can
be debt within the meaning of sub-section (11) of section 5
of the 2016 Code.
Held: There cannot be a debt within the meaning of sub-section
(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. [Para 20 (a)]
Insolvency and Bankruptcy Code, 2016 – sub-section (8) of s.
5 – What is the test to determine whether a debt is a financial
debt within the meaning of sub-section (8) of section 5 of the
2016 Code.
Held: Sub-section (8) of section 5 defines “financial debt” – 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 – Thus,
the test to determine whether a debt is a financial debt within
* Author
216 [2024] 5 S.C.R.

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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.
[Paras 12 and 20 (b)]
Insolvency and Bankruptcy Code, 2016 – Is it necessary to
ascertain what is the real nature of the transaction reflected
in the writing, while deciding the issue whether a debt is a
financial debt or an operational debt.
Held: 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 – The written document cannot be taken for its face value.
[Paras 20 (c) and 14]
Insolvency and Bankruptcy Code, 2016 – When is the debt,
an operational debt:
Held: 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. [Para 20 (d)]

Case Law Cited
Anuj Jain, Interim Resolution Professional for Jaypee
Infratech Limited v. Axis Bank Limited & Ors. [2020] 8
SCR 291 : (2020) 8 SCC 401; Phoenix ARC Private
Limited v. Spade Financial Services Limited & Ors.
[2021] 15 SCR 1079 : (2021) 3 SCC 475; Pioneer
Urban Land and Infrastructure Ltd. & Anr. v. Union of
India & Ors. [2019] 10 SCR 381 : (2019) 8 SCC 416
– relied on.
Swiss Ribbons Private Limited and Anr. v. Union of
India & Ors [2019] 3 SCR 535 : (2019) 4 SCC 17;
Tuticorin Alkali Chemicals & Fertilisers Ltd., Madras v.
Commissioner of Income Tax, Madras [1997] Supp. 1
SCR 528 : (1997) 6 SCC 117; Consolidated Construction
Consortium Limited v. Hitro Energy Solutions Private
[2024] 5 S.C.R. 217

Global Credit Capital Limited & Anr. v. Sach Marketing Pvt. Ltd. & Anr

Limited [2022] 2 SCR 212 : (2022) 7 SCC 164; New
Okhla Industrial Development Authority v. Anand
Sonbhadra [2022] 5 SCR 319 : (2023) 1 SCC 724;
V.E.A. Annamalai Chettiar & Ors. v. S.V.V.S. Veerappa
Chettiar & Ors. AIR 1956 SC 12 – referred to.

List of Acts
Insolvency and Bankruptcy Code, 2016.

List of Keywords
sub-section (11) of section 5 of Insolvency and Bankruptcy Code,
2016; sub-section (8) of section 5 of Insolvency and Bankruptcy
Code, 2016; Means and include in sub-section (8) of section 5
of Insolvency and Bankruptcy Code, 2016; Debt; Financial debt;
Operational debt; Nature of transaction; Written agreement; Service;
Debt connection or co-relation with service; Time value of money.

Case Arising From
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1143 of 2022
From the Judgment and Order dated 07.10.2021 of the National
Company Law Appellate Tribunal in CAAT (I) No.180 of 2021
With
Civil Appeal Nos. 6991-6994 of 2022
Appearances for Parties
Gopal Jain, Sr. Adv., Ms. Mithu Jain, Advs. for the Appellants.
C.U. Singh, Sr. Adv., N.P.S. Chawla, Sujoy Datta, Ms. Kinjal Goyal,
Ms. Kashish Chhabra, Ms. Bidya Mohan, Ashish Rana, Abhishek
Anand, Mohak Sharma, Karan Batura, Siddharth Naidu, Ms. Anusuya
Sadhu Sinha, M/s. KSN & Co., Advs. for the Respondents.
Judgment / Order of the Supreme Court

Judgment
Abhay S. Oka, J.
1. These appeals take exception to the separate impugned judgments
and orders dated 7th October 2021 and 29th October 2021 passed
by the National Company Law Appellate Tribunal (for short, ‘the
218 [2024] 5 S.C.R.

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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 of 2022 are
concerned, the issue is whether the 1st to 4th 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 the agreement/letter dated 1st 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 creditor. The claim was withdrawn, and on 19th September
2018, the first respondent filed a claim with the second respondent
[2024] 5 S.C.R. 219

Global Credit Capital Limited & Anr. v. Sach Marketing Pvt. Ltd. & Anr

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 Committee of Creditors approved a resolution plan
submitted by M/s. Kals Distilleries Pvt. Ltd. The second respondent
applied to the NCLT to approve the resolution plan based on the
approval. On 18th 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 creditor and not an operational
creditor. The NCLT, on 13th 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
220 [2024] 5 S.C.R.

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is an operational creditor going by the agreements dated 1st April
2014 and 1st 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 sub-section
(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
senior counsel relied upon a decision of this Court in the case of
Swiss Ribbons Private Limited and Anr. v. Union of India & Ors.1.
He also relied upon a decision of this Court in the case of Pioneer
Urban Land and Infrastructure Ltd. & Anr. v. Union of India &
Ors.2. 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 Energy
Solutions Private Limited4. 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

1 [2019] 3 SCR 535 : (2019) 4 SCC 17
2 [2019] 10 SCR 381 : (2019) 8 SCC 416
3 [1997] Supp. 1 SCR 528 : (1997) 6 SCC 117
4 [2022] 2 SCR 212 : (2022) 7 SCC 164
[2024] 5 S.C.R. 221

Global Credit Capital Limited & Anr. v. Sach Marketing Pvt. Ltd. & Anr

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
Limited & Ors.5, Phoenix ARC Private Limited v. Spade Financial
Services Limited & Ors.6 and New Okhla Industrial Development
Authority v. Anand Sonbhadra7. 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
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,
Interim Resolution Professional for Jaypee Infratech Limited5.
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

5 [2020] 8 SCR 291 : (2020) 8 SCC 401
6 [2021] 15 SCR 1079 : (2021) 3 SCC 475
7 [2022] 5 SCR 319 : (2023) 1 SCC 724
222 [2024] 5 S.C.R.

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Land and Infrastructure Ltd2, 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 V.E.A. Annamalai Chettiar & Ors. v. S.V.V.S. Veerappa
Chettiar & Ors.8, 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
sub-section (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, he submitted that in view of the judgment dated
29th September 2018 of the NCLAT on an application filed by M/s.
New View Consultants Pvt. Ltd., the second respondent categorised

8 AIR 1956 SC 12
[2024] 5 S.C.R. 223

Global Credit Capital Limited & Anr. v. Sach Marketing Pvt. Ltd. & Anr

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;
.. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .”
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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 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,-
[2024] 5 S.C.R. 225

Global Credit Capital Limited & Anr. v. Sach Marketing Pvt. Ltd. & Anr

(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.”
(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
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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 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
[2024] 5 S.C.R. 227

Global Credit Capital Limited & Anr. v. Sach Marketing Pvt. Ltd. & Anr

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”.
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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 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
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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 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
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“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
ARC Private Limited6 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 definition. On the
other hand, an “operational debt” would include
a claim in respect of the provision of goods or
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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 in
Black’s Law Dictionary (10th 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:
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“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 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. & Anr2,
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
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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)(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
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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 agreement/letter dated 1st 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 12 months ending 31st March, 2015.
5. The settlement of commission as stated above in
point no.1 shall be on quarterly basis.
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6. Notwithstanding anything provided above this
appointment in terms hereof may be terminated by
us during the term of 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
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that the agreement’s duration was up to 31st March 2016. Clause
(10) of the agreement/letter dated 1st 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
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 sub-section
(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 sub-section (6) of Section 3 of the IBC
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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 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.
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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 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 2016-17, 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
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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 sub-section (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.
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OPERATIVE PART
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.

Headnotes prepared by: Ankit Gyan Result of the case:
Appeals dismissed.