NCLAT Rules with Finality: Security Deposit Without Time Value of Money is Not Financial Debt Under IBC
- REEDLAW
- 14 hours ago
- 3 min read
The NCLAT has ruled with finality that a security deposit lacking the element of time value of money does not qualify as a financial debt under the Insolvency and Bankruptcy Code.
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, comprising Justice Rakesh Kumar Jain (Judicial Member) and Technical Members Mr. Naresh Salecha and Mr. Indevar Pandey, reviewed an appeal and related interlocutory applications, holding that a refundable security deposit does not constitute a financial debt under Section 5(8) of the Insolvency and Bankruptcy Code, 2016, where the disbursal lacks time value of money and the interest clause is contingent upon termination, thereby characterizing it as penal or liquidated damages rather than consideration for the time value of money.
The present legal note pertains to the decision rendered by the National Company Law Appellate Tribunal (NCLAT) in the matter involving Global Indian School Education Services Pvt. Ltd. and the Corporate Debtor, Housing Development and Infrastructure Ltd. The Appellant had filed an appeal under Section 61(1) of the Insolvency and Bankruptcy Code, 2016 (IBC), challenging the order of the National Company Law Tribunal (NCLT), Mumbai Bench, which had dismissed its interlocutory application. The dispute stemmed from a 2015 Memorandum of Understanding (MoU) executed for the development of a school building, under which the Appellant paid a sum of ₹2,37,61,440/- as a security deposit. The Appellant contended that due to the Corporate Debtor’s failure to fulfil Conditions Precedent, the MoU was terminated and the refund of the deposit with interest became due, thus qualifying the transaction as a financial debt under Section 5(8) of the Code.
The Appellant argued that the amount had the commercial effect of borrowing, was refundable, and carried interest upon termination, thereby satisfying the criteria of financial debt. However, the Resolution Professional rejected the claim as neither financial nor operational debt, classifying it instead as a claim by “other creditors.” The NCLT concurred with this classification, noting that the transaction lacked the core attributes of a financial debt, particularly the element of “time value of money.” The interest clause was deemed penal in nature and applicable only upon termination, not as consideration for the use of funds over time. The Appellant’s attempt to distinguish the MoU as a commercial agreement rather than a lease-based arrangement was rejected by the Adjudicating Authority.
In its findings, the NCLAT affirmed that no lease deed had ever been executed and that the security deposit was clearly intended to secure future rental obligations under a proposed lease. The Tribunal emphasised that termination of the MoU, necessary to trigger any refund or interest obligations, had not occurred as per the MoU’s procedural requirements—specifically, written notice under Clauses 3.3 and 22 had not been issued. As a result, the claim for refund and interest did not crystallise. Moreover, the Tribunal found that the interest provision in Clause 3.3 was in the nature of liquidated damages, applicable only upon default, and not indicative of a transaction involving the time value of money.
The NCLAT applied the legal tests laid down in precedents such as Pioneer Urban Land and Infrastructure Limited and Another v. Union of India and Others, REEDLAW 2019 SC 08502 and New Okhla Industrial Development Authority v. Anand Sonbhadra and Another, REEDLAW 2022 SC 05503, reaffirming that a financial debt must involve disbursal, commercial effect of borrowing, and time value of money. Since these elements were not present, the claim could not be reclassified as financial debt. The Tribunal also rejected the Appellant’s claim that the deposit amounted to a mobilisation advance, as the MoU did not support this assertion either in language or intent.
Ultimately, the NCLAT concluded that the transaction was correctly classified by the Resolution Professional and the NCLT as a security deposit falling outside the purview of financial or operational debt. The appeal was found to be devoid of merit and was accordingly dismissed without costs, with all connected applications also closed.
Mr. Krishnendu. Datta, Sr. Advocate with Mr. Varun K., Mr. Parag K., Ms. Falguni Thakkar and Mr. Rahul Gupta, Advocates, represented the Appellant.
Ms. Meghna Rao and Mr. Harshit Goel, Advocates, appeared for the Respondent.
Subscribers can access premium content such as the full text of the case, detailed analysis, ratio decidendi, headnotes, legal research, cited case laws, and the latest updates on statutes, notifications, and more. To subscribe, please click Subscribe.
If you are a subscriber, please explore these resources by clicking the following citation/link.