Security deposits with interest qualify as financial debt under Section 5(8)(f) IBC, making depositors financial creditors

The SC dismissed an appeal regarding whether security deposits under sales promoter agreements constitute financial debt under IBC. The corporate debtor appointed respondent as sales promoter for Rs.4,000/- monthly plus security deposit refundable with 21% interest. The SC held that security deposits with interest represent financial debt under Section 5(8)(f) of IBC as they have commercial effect of borrowing, evidenced by corporate debtor treating amounts as long-term liabilities in financial statements. Since no forfeiture clause existed, refund obligation with interest qualified as financial debt, making respondent a financial creditor entitled to initiate CIRP under Section 7.

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Issues Involved:
1. Whether the first respondent is a financial creditor u/s 5(7) of the Insolvency and Bankruptcy Code, 2016 (IBC).
2. Whether the 1st to 4th respondents in Civil Appeal nos.6991-6994 of 2022 are financial creditors of the corporate debtor.

Issue 1: Financial Creditor Status of the First Respondent (Civil Appeal no.1143 of 2022)
The primary issue is whether the first respondent qualifies as a financial creditor u/s 5(7) of the IBC. The agreements dated 1st April 2014 and 1st April 2015 between the corporate debtor and the first respondent were examined. These agreements appointed the first respondent as a 'Sales Promoter' with a condition to deposit a minimum security, which carried interest @21% per annum. The National Company Law Tribunal (NCLT) initially rejected the first respondent's claim as a financial creditor. However, the National Company Law Appellate Tribunal (NCLAT) reversed this decision, holding that the first respondent was indeed a financial creditor.

Issue 2: Financial Creditor Status of the 1st to 4th Respondents (Civil Appeal nos.6991-6994 of 2022)
The second issue pertains to whether the 1st to 4th respondents are financial creditors of the same corporate debtor. The respondents had provided financial assistance to the corporate debtor in various amounts. The Resolution Professional rejected their claims as financial creditors, leading them to file applications before the NCLT, which were also rejected. The NCLAT allowed their appeals, relying on its judgment in Civil Appeal no.1143 of 2022.

Factual Aspects:
The agreements dated 1st April 2014 and 1st April 2015 required the first respondent to deposit a security amount with the corporate debtor, which would earn interest. The corporate debtor acknowledged the liability of paying interest on the security deposit and deducted TDS on the interest payable. The NCLAT found that the amounts were treated as long-term loans and advances in the financial statements of the corporate debtor, indicating the commercial effect of borrowing.

Consideration of Submissions:
The learned senior counsel for the appellants argued that the first respondent is an operational creditor, citing the definition of "operational debt" u/s 5(21) of the IBC. They contended that the security deposit was not intended as a financial facility. In contrast, the learned senior counsel for the first respondent argued that the agreements had the commercial effect of borrowing, satisfying the criteria for a financial debt u/s 5(8) of the IBC.

Findings on Factual Aspects:
The Supreme Court found that the security deposit amounts under the agreements constituted financial debt. The provision for interest payment indicated consideration for the time value of money. The financial statements and the letter from the corporate debtor confirmed that the amounts were treated as borrowed funds, fulfilling the criteria for a financial debt.

Conclusion:
The Supreme Court concurred with the NCLAT's view that the amounts covered by the security deposits under the agreements constituted financial debt, making the first respondent a financial creditor u/s 5(7) of the IBC. Similarly, the contracts in Civil Appeal nos.6991-6994 of 2022 had similar clauses, leading to the same conclusion.

Summary:
a. 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 thereof.
b. The test to determine whether a debt is a financial debt u/s 5(8) is the existence of a debt along with interest, disbursed against the consideration for the time value of money.
c. The real nature of the transaction must be ascertained from the written agreement/arrangement.
d. A debt is an operational debt only if the claim has some connection or correlation with the service subject matter of the transaction.

Operative Part:
The Supreme Court upheld the NCLAT's judgments, confirming that the first respondent and the 1st to 4th respondents in Civil Appeal nos.6991-6994 of 2022 are financial creditors. The appeals were dismissed, and the Resolution Professional was directed to continue with the Corporate Insolvency Resolution Process (CIRP) in accordance with the impugned judgments.

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