Decoding Financial Debt under IBC, 2016

Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC) defines ‘financial debt’ as a debt along with interest, if any, which is disbursed against the consideration for the time value of money.

It includes:

1. Any money borrowed against the payment of interest,

2. Any amount raised by acceptance under any acceptance credit facility or its dematerialised equivalent,

3. Amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument,

4. The amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed,

5. Receivables sold or discounted other than any receivables sold on nonrecourse basis,

6. Any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing,

7. Any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account,

8. Any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution,

9. The amount of any liability in respect of any guarantee or indemnity for any of these items.

The Delhi Bench of the NCLT in the case of Nikhil Mehta v AMR Infrastructure Limited, while interpreting the vital definitions of 'financial creditor' and 'financial debt', has rejected the application on the grounds of the applicant and the amount claimed to be unpaid not falling within the scope of the respective definitions.

The applicant, Nikhil Mehta (HUF) along with the other applicants, had filed an insolvency application against AMR Infrastructure Limited for failing to pay 'Assured Returns'. Assured Returns, as per several memorandums of understanding entered among the corporate debtor and the applicants (at the time of booking of several real estate units), were the sums of money that the applicants were promised to be paid on a monthly basis until the possession of real estate units booked by them was handed over.

The applicants had argued that since the amount was in the form of an Assured Return, the failure to make such payment entitled the applicants to initiate the CIR Process under the Code. The NCLT rejected the application on the ground that the Assured Returns promised to be paid to the applicants and defaulted upon by the corporate debtor did not satisfy the definition of 'financial debt' and the applicants therefore, were not entitled to prefer an application under the Code as 'financial creditors'.

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