Security deposit is not financial debt where it lacks time value of money and commercial borrowing effect.

A refundable security deposit paid to secure monthly rentals under an operational lease was not financial debt under the Insolvency and Bankruptcy Code because it was not disbursed against consideration for the time value of money and lacked the commercial effect of borrowing. The Tribunal held that the transaction's real nature, not the labels in the memorandum, was determinative, and that an interest clause triggered only on breach or termination was penal or in the nature of liquidated damages, not evidence of borrowing. The claimant therefore could not be treated as a financial creditor.

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Issues: Whether the amount paid under the memorandum of understanding was a financial debt under the Insolvency and Bankruptcy Code, 2016, or merely a security deposit or other claim not falling within financial debt.

Analysis: The decisive test was whether the disbursal was against consideration for the time value of money and had the commercial effect of borrowing. The amount was found to have been paid as a security deposit to secure monthly rentals under an operational lease arrangement, with the parties' transaction being directed to development and use of premises for a school. The agreement showed that no interest accrued from the date of disbursal, and the 9% interest clause operated only on breach or termination, making it penal in nature or in the nature of liquidated damages. The Court held that such a contingent refund clause did not convert the security deposit into borrowed money. The real nature of the transaction, not the labels used in the memorandum, was determinative, and the cited precedent on financial debt did not assist the appellant on these facts.

Conclusion: The amount was not financial debt and the appellant was not entitled to be treated as a financial creditor.

Final Conclusion: The appeal failed because the transaction was held to be a refundable security deposit linked to rental obligations, lacking the essential characteristics of financial debt under the Code.

Ratio Decidendi: A refundable security deposit paid under an arrangement for securing rent does not become financial debt unless it is disbursed against the consideration for the time value of money and bears the commercial effect of borrowing; a contingent penal or liquidated-damages interest clause triggered only on breach or termination is insufficient.

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