Summary
The true substance of a written transaction determines whether debt is financial or operational. Refundable deposits carrying 21% interest under sales-promoter agreements were financial debt where they had no link to service performance or forfeiture and, supported by acknowledgments and accounts, had the commercial effect of borrowing. Interest alone was not decisive. The Court upheld the NCLAT’s financial-creditor classification in the lead and similar connected cases and directed CIRP continuation accordingly.
Issues
- Whether the sales-promoter deposits were operational or financial debt.
- What substantive test governed Section 5(8), including its enumerated categories.
- Whether the deposit claim correlated with the service obligations.
Provisions considered
- Sections 3(6), 3(11) and 3(33), Insolvency and Bankruptcy Code, 2016Debt requires a liability or obligation in respect of a claim; the refund right was a claim and the written fund-transfer arrangement was a transaction. (¶¶ 10, 11, 14, 16)
- Sections 5(7) and 5(8), particularly clause (f), Insolvency and Bankruptcy Code, 2016Disbursal for time value is essential, including for the listed categories; the deposits here had the commercial effect of borrowing and made the claimants financial creditors. (¶¶ 12, 16, 17, 18, 19, 20(b))
- Section 5(21), Insolvency and Bankruptcy Code, 2016A service-related operational claim must connect or correlate with the services; the deposit here had no such nexus, unlike the monthly remuneration. (¶¶ 14, 15, 20(c), 20(d))
Held
- A debt must rest on a claim. Financial debt requires disbursal against consideration for the time value of money, with interest if any. Transactions within Section 5(8)(a) to (i) must also satisfy that essential test; their labels alone do not establish financial debt. (¶¶ 10, 11, 12, 20(b))
- The real nature of the written transaction governs classification. Where a written arrangement provides services, only a claim connected or correlated with those services is operational debt on that basis. Interest by itself is not the sole material classification criterion. (¶¶ 14, 15, 20(c), 20(d))
- The agreements provided modest fixed monthly sales-promoter remuneration, but the large deposits were unrelated to performance and lacked forfeiture provisions. They were repayable with 21% interest after the agreed period. The deposit-refund claim was distinct from the service-remuneration claim. (¶¶ 13, 14, 15)
- The written transfer of funds, interest consideration, liability acknowledgment and treatment as long-term loans/advances or liabilities established the commercial effect of borrowing. The deposits therefore constituted financial debt, making the persons owed those debts financial creditors. Similar connected letter agreements attracted the same result. (¶¶ 16, 17, 18, 19)
- The NCLAT judgments were confirmed, all appeals dismissed without costs, and the resolution professional directed to continue CIRP consistently with those judgments. (¶ 21)
Result
Appeals dismissed without costs; NCLAT financial-creditor classifications affirmed. Resolution professional to continue CIRP in accordance with the upheld judgments.