In its decision dated October 7, 2021 ("Judgement") in the case of Sach Marketing Private Limited v. Resolution Professional of Mount Shivalik Industries Limited, Ms. Pratibha Khandelwal [Company Appeal (AT) (Insolvency) No. 180 of 2021], the National Company Law Appellate Tribunal Principal Bench, New Delhi ("NCLAT") held that "Security Deposit" and the interest thereon would fall within the ambit of the definition of "Financial Debt.
In the instant case titled Sach Marketing Private Limited v. Resolution Professional of Mount Shivalik Industries Limited, Ms. Pratibha Khandelwal the issue raised for clarification before the NCLAT was:
Whether a security deposit and the interest earned on it would be considered financial debt under the criteria.?
With regard to this issue, with regard to this issue, The NCLAT recognised that Clause 10 of the agreement was a conditional clause, indicating that the Appellant would only be recruited as a sales promoter in the event that he made such a deposit. The aforementioned condition required the Appellant to give the Corporate Debtor a minimum security deposit of Rs. 53,15,000/-, with interest accruing at a rate of 21% annually. The amount against which interest at 21 per cent per annum would be paid by the Corporate Debtor to the Appellant was adjusted to Rs. 32,85,850/-, even though the minimum "Security Deposit" of Rs. 53,15,000/- bearing interest was kept. The NCLAT also remarked that it was evident from the terms of the agreement that the Appellant was expected to furnish sufficient monies to cover the operational and other costs. In addition, it was clear from the aforementioned agreement that the appellant was required to contribute an additional sum of Rs. 7,85,850, as well as pay interest on that sum at a rate of 21 per cent annually on top of the Rs. 53,15,000 in interest, already paid. It is important to note that in the agreement dated April 1, 2014, this sum was not even referred to as "security."
In addition, it was clear from the aforementioned agreement that the appellant was required to contribute an additional sum of Rs. 7,85,850, as well as pay interest on that sum at a rate of 21 per cent annually on top of the Rs. 53,15,000 in interest, already paid. It is important to note that in the agreement dated April 1, 2014, this sum was not even referred to as "security."
The NCLAT noted that any financial transaction, which is often for a sum of money received today, to be reimbursed over time in instalments or in full at some point in the future, has been included by the Legislature in the definition of "Financial Debt." The NCLAT pointed out that the definition of time value in Black's Law Dictionary is "the cost incurred by the investor in waiting until the maturity of an investment or the receipt of related revenue." In this instance, it is important to understand the term "Security Deposit" correctly because it appears in clause 10 of the agreement. The NCLAT said that the wording of the agreement should be used to establish the transaction's genuine effect.
The term loan dated April 1, 2014, and April 1, 2015, which stated the time periods, showed that the payments were paid with a specific duration and tenure, the NCLAT noted. The Corporate Debtor had accepted the "Security Deposit" from the Appellant and had temporarily offset such amounts for the years 2014–2015 with interest. According to the NCLAT, the payment of interest on the sums borrowed by the "Corporate Debtor" is nothing more than accounting for the time value of money, and the appellant is being paid interest for using the appellant's money over time. As a result, the NCLAT came to the judgement that the appellant is a "Financial Creditor."
The NCLAT categorically stated that,
"For all the aforenoted reasons, this Appeal is allowed and the Impugned Order is set aside. We hold that the said amount of debt herein is to be treated as a ‘Financial Debt’. We are also conscious of the importance of timelines to be maintained by us as observed by the Hon’ble Supreme Court in ‘Ebix Singapore Pvt. Ltd.’ Vs. ‘Committee of Creditors of Educomp Solutions Ltd. & Anr.’ Civil Appeal No. 3224 of 2020 and therefore request the Adjudicating Authority to decide the matter as expeditiously as practicable.”