In the landmark case of Global Credit Capital Ltd. and Anr. v. Sach Marketing Pvt. Ltd. and Anr., the Hon’ble Supreme Court of India (Supreme Court) delivered a comprehensive judgment that delves into the intricacies of debt classification under the Insolvency and Bankruptcy Code, 2016 (IBC). The judgment, dated April 25, 2024, was presided over by Justices Abhay S. Oka and Pankaj Mithal, who meticulously addressed several pivotal issues that have far-reaching implications in the realm of insolvency law.

 

The crux of the matter revolved around four central questions:

 

  • Firstly, whether a debt can exist within the meaning of sub-section (11) of section 3 of the IBC without an actual claim under sub-section (6) of the same section. The Supreme Court held that a debt cannot exist in isolation and must be accompanied by a claim.

 

  • Secondly, the Supreme Court elaborated on the test to determine whether a debt qualifies as a financial debt within the meaning of sub-section (8) of section 5 of the IBC. The definition of “financial debt” was scrutinized, and the court clarified that it encompasses both the disbursement against the consideration for the time value of money and specific categories enumerated from (a) to (i).

 

  • Thirdly, to ascertain the real nature of the transaction being financial or operational debt, the Supreme Court underscored the importance of understanding the underlying nature of the transaction to accurately classify the debt.

 

  • Lastly, the Supreme Court provided clarity as to when a debt is considered an operational debt, emphasizing the need to establish a connection between the transaction and the service or goods provided.

 

Pertinently, the present judgment is a consequence of the judgment of the National Company Law Appellate Tribunal (NCLAT), whereby the NCLAT qualified debt arising from security deposit as financial debt. The Apex Court referred to a series of precedents, inter alia judgments such as Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited (Civil Appeal Nos. 8512-8527 of 2019 with Civil Appeal Nos. 6777-6797, 9357-77 of 2019) and Pioneer Urban Land and Infrastructure Ltd. & Anr. v. Union of India & Ors.(Writ Petition (Civil) Nos. 43, 99, 124, 121, 129 of 2019), to ascribe the scope which has been extended towards the definition of financial debt as defined under Section 5(8) of the IBC.

 

In conclusion, the aforesaid judgment of the Supreme Court serves as a definitive guide on the classification of debts under the IBC. It reinforces the principle that the nature of the transaction is paramount in determining the classification of debt. The judgment harmonizes the conflicting interpretations of the IBC’s provisions and provides much-needed clarity to stakeholders involved in the insolvency resolution process. This decision not only resolves the immediate dispute but also sets a precedent for future cases, ensuring that the objectives of the IBC are met with precision and fairness.

Authors & Contributors

Partner:

Abhishek Swaroop

 

Associate(s):

Bhawana Sharma

Kirti Talreja