Global Credit Capital Ltd. vs. Sach Marketing Pvt. Ltd. (Supreme Court, 25 April 2024)
Case Overview
Appellant: Global Credit Capital Ltd.
Respondent: Sach Marketing Pvt. Ltd.
Court: Supreme Court of India
Date of Judgment: April 25, 2024
Key Issue: Whether Sach Marketing Pvt. Ltd. qualifies as a financial creditor under the Insolvency and Bankruptcy Code, 2016 (IBC) based on security deposits paid to the corporate debtor, Mount Shivalik Industries Ltd.
Background of the Case
Agreements Between Parties:
Sach Marketing Pvt. Ltd. entered into two agreements with Mount Shivalik Industries Ltd. (the corporate debtor) in 2014 and 2015, acting as a sales promoter for the company’s beer products in Ranchi, Jharkhand.
Security Deposits:
Under these agreements, Sach Marketing paid significant security deposits: ₹53,15,000 and ₹32,85,850.
The agreements specified interest at 21% per annum and required the corporate debtor to refund the deposits with interest at the end of the contract period.
Insolvency Proceedings:
In 2018, Mount Shivalik Industries entered corporate insolvency resolution.
Sach Marketing initially filed a claim as an operational creditor, then withdrew it, and later filed as a financial creditor.
The Interim Resolution Professional (IRP) partially admitted the claim but rejected financial creditor status.
NCLT dismissed Sach Marketing’s appeal, but NCLAT ruled in favor, classifying the deposits as financial debt.
Legal Issues
Definition of Financial Debt vs Operational Debt (IBC):
Financial Debt: A debt involving borrowed money or a liability for the time value of money.
Operational Debt: A claim arising from the provision of goods or services.
Nature of the Security Deposit:
Was the security deposit a financial transaction (loan-like) or just an advance for services?
Could Sach Marketing be treated as a financial creditor entitled to rights under the IBC?
Supreme Court Analysis
Substance Over Form:
The Court emphasized examining the real nature of the transaction, not just how it was labeled.
Key points:
Deposits were large amounts.
They carried high interest (21% per annum).
Corporate debtor was obliged to refund the deposit with interest.
These characteristics are typical of a loan/financial debt, not a mere service contract.
Corporate Debtor’s Accounting Treatment:
The company treated these deposits as loans in its financial statements, supporting the claim that this was financial debt.
Precedents Considered:
The Court referred to earlier rulings stating that any transaction with the commercial effect of borrowing qualifies as financial debt, even if it is disguised as something else.
Judgment
Financial Creditor Status:
The Supreme Court upheld NCLAT’s decision, confirming that Sach Marketing is a financial creditor under IBC.
Security deposits with interest were treated as financial debt, giving Sach Marketing rights under the insolvency resolution process.
Appeal Outcome:
The appeal filed by Global Credit Capital Ltd. was dismissed.
Significance of the Case
Clarity on Debt Classification:
The ruling clarified the distinction between financial debt and operational debt under IBC.
Transactions that function like loans are treated as financial debt, even if called a security deposit.
Rights of Creditors:
Entities providing funds with loan-like obligations are recognized as financial creditors, ensuring priority and protection in insolvency proceedings.
Guidance for Future Cases:
Establishes a precedent for evaluating security deposits and other similar arrangements in insolvency matters.
Courts must examine commercial substance, not just contractual labels.
✅ In short:
Sach Marketing paid large security deposits with high interest to Mount Shivalik Industries.
These deposits had the commercial effect of borrowing.
Supreme Court held that Sach Marketing is a financial creditor under IBC.
Appeal by Global Credit Capital Ltd. was dismissed.
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