2025 (2) TMI 635 - AT - IBC

Security deposit with interest clause remains operational debt, not financial debt under Section 5(8)

NCLAT Principal Bench dismissed appeal challenging classification of appellant's claim as operational debt rather than financial debt. Appellant paid Rs. ... Relationship of appellant with the Corporate Debtor - Whether the claims of the Appellant should have been treated as financial debt or as other debt as classified by the Respondent? - HELD THAT:- MoU dated 19.12.2015 was signed between the Appellant and the Corporate Debtor for handing over premise by the Corporate Debtor to the Appellant which has not happened. It is also fact that no separate lease agreement was signed or entered into between the Appellant and the Corporate Debtor, although, word like “lessor” and “lessee” have been used in the MoU. It is required to look into the intent of the transaction between both parties for determining whether the money transferred by the Appellant to the Corporate Debtor was financial debt or otherwise. It is not disputed that Rs. 2,37,61,440/- was indeed received by the Corporate Debtor from the Appellant but nature of the said money is in dispute. In the present case, it is already noted that there has been disbursal of money by the Appellant to the Corporate Debtor. However, what is to be seen is as to whether the other two conditions of Section 5(8) are satisfied by the Appellant or not i.e., whether the transaction got commercial effect of the borrowing and whether there is time value of money - in the present case the money disbursed by the Appellant is clearly security deposit given under MoU for securing the monthly rental from the Appellant. It is found from the terms of the MoU that the security deposit was not disbursed in consideration of the time value of money as no interest would accrue from the date of disbursement. A meaningful reading of Clauses 3.3 and 8.4 of the MoU reveals that the stipulation for interest was included solely to impose a penalty, should the Corporate Debtor fail to fulfil its obligations under the MoU to the satisfaction of the Appellant. The interest clause could only be involved upon a breach or termination of the agreement, indicating that the security deposit does not possess the characteristics of a financial transaction, therefore, the security deposit does not qualify as a financial debt under the Code - Clause 8.5 of the MoU explicitly states that the purpose of the security deposit was to impose penal interest in the event of the Corporate Debtor's failure to refund the security deposit to the Appellant which makes it clear that the security deposit was not intended for funding any construction activity by alleged mobilisation advance, as claimed by the Appellant. Conclusion - The claim by the Appellant did not qualify as a financial debt under the Code. There are no merit in the Appeal - appeal dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal question considered in this case was whether the claim by the Appellant, Global Indian School Education Services Pvt. Ltd., should be classified as a 'financial debt' under Section 5(8) of the Insolvency and Bankruptcy Code, 2016, or as 'other debt' as classified by the Respondent, the Resolution Professional of Housing Development and Infrastructure Ltd. (Corporate Debtor).2. ISSUE-WISE DETAILED ANALYSISRelevant legal framework and precedents:The legal framework involved Section 5(8) of the Insolvency and Bankruptcy Code, 2016, which defines 'financial debt' as a debt disbursed against the consideration for the time value of money. The precedents considered include the Supreme Court judgments in Pioneer Urban Land and Infrastructure Limited v. Union of India and New Okhla Industrial Development Authority v. Anand Sonbhadra, which outline the criteria for classifying a debt as financial, including disbursal, commercial effect of borrowing, and consideration for the time value of money. The case of Global Credit Capital Limited was also referenced for its interpretation of financial debt.Court's interpretation and reasoning:The Tribunal focused on whether the transaction between the Appellant and the Corporate Debtor had the commercial effect of borrowing and whether there was consideration for the time value of money. It was noted that the MoU between the parties involved a security deposit meant to secure monthly rental payments, not a loan or financial facility. The interest clause in the MoU was determined to be a form of liquidated damages or penal interest, not indicative of a financial debt.Key evidence and findings:The Tribunal examined the MoU, particularly clauses related to the security deposit and interest. It was found that the security deposit was refundable without interest after the lease period, indicating no time value of money. Additionally, the interest clause was contingent upon the termination of the MoU, further supporting the classification as a penalty.Application of law to facts:The Tribunal applied the criteria from Section 5(8) and relevant case law to determine that the transaction did not meet the requirements for a financial debt. The security deposit was not disbursed with the expectation of earning interest or profit, but as a security for rental obligations, lacking the commercial effect of borrowing.Treatment of competing arguments:The Appellant argued that the transaction should be considered a financial debt due to the refundable nature of the deposit and the stipulated interest. However, the Tribunal found that the interest was in the nature of a penalty, not a return on investment. The Respondent's argument that the transaction was a security deposit for rental payments, not a financial debt, was upheld.Conclusions:The Tribunal concluded that the transaction was not a financial debt but a security deposit for rental purposes, with the interest clause serving as a penalty for non-compliance, not a financial return.3. SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning:'The basic ingredient of Section 5(8) of the Code is that the money should have been disbursed against the consideration of time value of money.'Core principles established:The Tribunal emphasized that for a debt to be classified as financial, it must involve disbursal against consideration for the time value of money, with a clear commercial effect of borrowing. The mere presence of an interest clause contingent on breach or termination does not suffice.Final determinations on each issue:The Tribunal determined that the claim by the Appellant did not qualify as a financial debt under the Code. The security deposit was intended to secure rental payments, and the interest clause was a form of penal interest, not indicative of a financial transaction. Consequently, the appeal was dismissed, and the classification by the Respondent was upheld.