Insolvency and Bankruptcy Code
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This article is written by Ronika Tater from the University of Petroleum and Energy Studies, School of Law. In this article, she discusses the criteria of financial debt with the support of provisions and case laws. It also provides an analysis of the recent case on the same subject.


The Insolvency and Bankruptcy Code, 2016, (hereinafter referred to as the “Code”) was enacted as the earlier legislations were cumbersome, insufficient, and favoured the corporate debtors thereby resulting in huge outstanding debts to banks and financial institutions. Hence, the Code is a collection of laws on insolvency and bankruptcy that facilitates the resolution of corporate bankruptcy in a time-bound manner, promotes entrepreneurship, security of creditors, and balances the interest of all stakeholders. 

What do we understand by financial debt

A ‘financial debt’ has an inclusive and non-exhaustive definition as stated in Section 5(8) of the Insolvency and Bankruptcy Code, 2016 that defines the term ‘financial debt’ as a debt consisting of interest which is paid against the consideration for the time value of money. Moreover, financial creditors consist of those people whose relationship with the entity is based on pure financial contracts such as a loan or debt security. The following are some of the criteria included in the definition of financial debt are below-mentioned:

  • Money borrowed in anticipation of the payment of interest.
  • Amount raised by acceptance through any acceptance credit facility or its dematerialised equivalent.
  • Amount raised by any note purchase facility or by the issuance of bonds, notes, shares, debentures, loan stock, or any other instrument.
  • Amount raised by forwarding sale or purchase agreement or any other transaction having the similar commercial effect of a borrowing.
  • Amount consisting of any liability of any lease or hire purchase contract which may be termed as finance or capital lease as per the Indian Accounting Standards or any other similar standards.
  • Any receivables sold or discounted regardless of any receivable sold on a non-recourse basis.
  • Any derivative transaction entered intending to protect against or benefit from fluctuation in any rate or price and for calculating the value of the derivative transaction only the market value should be considered.
  • Any counter-indemnity obligation consisting of a guarantee, bond, indemnity, documentary letter of credit, or any similar instrument issued by the bank or financial institution.
  • Amount of any liability consisting of guarantee or indemnity for any of the above-mentioned items.

Further, to have a better understanding of the term financial debt, it is essential to understand the term time value of money. As per the Black’s Law Dictionary, the “time-value” means that the price is associated with the length of time for which the investor should wait until the investment matures or any related income is earned on the same.

Case analysis of Nikhil Mehta v. AMR Infrastructure Ltd.

The case of Nikhil Mehta v. AMR Infrastructure Ltd, (2017) states the vital definition of ‘financial creditor’, ‘financial debt’ and time value of money. The National Company Law Tribunal (NCLT) while rejecting the application on the ground that the amount claimed to be unpaid in the following does not come under the ambit of the respective definition. However, on appeal, the National Company Law Appellate Tribunal (NCLAT) observed the amount claimed to be unpaid is within the scope of the relevant definition.


The applicant, Nikhil Mehta along with other applicants had filed an insolvency application against AMR Infrastructure Ltd. for the unpaid assured returns. The applicants were promised by the builder to be paid monthly until the possession of real estate units was handed over to them. The applicant brought the above case under the Code as the amount was in the form of an assured return and the failure to make such payment entitled the applicant to initiate a proceeding against the builder.


Whether the insolvency application on the ground that the assured return promised to be paid to the applicant and any default by the corporate debtor comes within the ambit of the financial debt or not?


The NCLT rejected the application on the ground that the transaction in the case was of the nature of a sale of goods regardless of being like the debt. Hence, the default by the corporate debtor did not satisfy the criteria of financial debt. However, an appeal of the following order was made in front of NCLAT to decide whether the sale and purchase agreement between the parties is like debt. The NCLAT observed that the consideration amount was every month until the possession is handed over. Thus, according to the time value of money against the consideration. Moreover, the applicants, in this case, were investors and the corporate debtor raised the amount by the nature of sale and purchase agreement which has a commercial effect of borrowing. Hence, the amount invested by the applicants falls within the ambit of financial debt as per Section 5(8) of the Code.

Recent amendment

The Insolvency and Bankruptcy Code (Amendment) Act, 2018 was included to balance the interest of various stakeholders especially the interests of home buyers and Micro, Small and Medium Enterprises (MSMEs) to promote resolution over the liquidation of the corporate debtor and to streamline the provisions relating to the eligibility of resolution applicants. Moreover, the term commercial effect of borrowing under Section 5(8)(f) of the Code included home buyers as financial creditors (FCs). Hence, the home buyers can initiate a corporate insolvency resolution process (CIRP) against builder developers as FCs.

What do we understand by operational creditor

The maintainability of the application for initiating corporate insolvency proceedings depends on the applicant to satisfy the tribunal that it falls either under the definition of ‘financial creditor’ or ‘operational creditor’ under the Code. Section 5(20) of the Code states that any person against whom an operational debt is owed or has been legally assigned or transferred. Section 5(21) of the Code defines the term operational debt as a claim consisting of goods and services including employment or a debt for the repayment of dues arising as per the law and payable to the central government, state government or any local authority.

The distinction between operation creditor and financial creditor

Financial creditors are those creditors where the relationship with the entity is related to any sort of credit facility such as a loan or debt security. Operational creditors are those where the entity comes from a transaction on operations. Hence, the Code provides various instances where a creditor has both a financial transaction as well as an operational transaction with the respective entity.

Case analysis of Phoenix Arc Pvt. Ltd. v. Spade Financial Service Ltd.

In February 2021, a three-judge bench of the Supreme Court in the case of Phoenix Arc Pvt. Ltd. v. Spade Financial Service Ltd ( 2021) held that a collusive transaction does not lead to the creation of financial debt under the Code. The Court also stated that a transacting party who is not a financial creditor cannot sit at the table in meetings of the Committee of Creditors (CoC). It also provides the meaning of the term ‘related party’ in consideration to the corporate debtor as such parties are excluded from the CoC process. To that end, the Court highly emphasized the purposive interpretation of the Code and its objectives and philosophy.

Background of the case

The applicants initiated the CIRP against the AKME Projects Ltd, the corporate debtors in the NCLT for the exclusion of two entities i.e, AAA Landmark Pvt. Ltd. and Spade Financial Services Pvt. Ltd. from the CoC process on the ground that they are related parties. The facts of the case stated that Spade had a memorandum of understanding with the corporate debtor where some amount was outstanding from the corporate debtor to Spade. Accordingly, NCLT observed that Spade and AAA do not qualify as financial creditors. It also stated that as per Section 21(2) of the Code, a financial creditor who is a related party of the corporate debtor has no right of representation, participation, or voting in the CoC.

In an appeal before the NCLAT, the Tribunal stated that Spade and AAA are “admittedly” financial creditors of the corporate debtor. It also stated that they are related parties and shall be excluded from the CoC process. Aggrieved by the NCLAT ruling, both the parties appeared before the Supreme Court.


  1. Whether Spade and AAA are financial creditors of the corporate debtor as prescribed by law?
  2. Whether Spade and AAA are related parties of the corporate debtor?
  3. Whether Spade and AAA have to be excluded from the CoC meetings?


The Supreme Court analysed the three issues to come to the finding of the case. Firstly, the Supreme Court referred to the case of Pioneer Urban Land and Infrastructure Ltd. v. Union of India (2019), where emphasis on the term of the time value of money was made. The Court noted that when a transaction is collusive it creates an illusion that the money has been paid to a borrower to receive consideration in the form of the time value of money. However, the real fact is that the parties have entered the transaction with a different or an ulterior motive. In similar words, it means that the real agreement between the parties transacting is something other than advancing a financial debt. Hence, this is against the principle of the Code as it leads to deprivation of benefits to the bona fide creditors of the company. In this particular case, the companies headed by Mr. Arun Anand and Mr. Anil Nanda were transacting in collusion and they do not constitute a financial debt, thereby resulting in exclusion from participating or voting in the decisions of the CoC.

Secondly, while dealing with the issue of the related party under the Code, it stated that the provision has a wider interpretation. If any party is a related party or so related to the corporate debtor they are not permitted in the CoC decisions. Hence, Section 5(24) defines a list of relationships to explain all kinds of inter-relationships between the financial creditor and the corporate debtor. Considering the particular case, the relationship between Mr. Arun Anand and Mr. Anil Nanda is based on the influence exercised by each party on the other’s group of companies. The collusive nature of Mr. Arun Anand was seen to guide the affairs of the corporate debtor. The Court held that Spade and AAA are related parties of the corporate debtor as per the purpose of this Code.

While considering the last issue, the Court relied on the principle, object, and the purpose of the IBC and stated that the exclusion under the first provision of Section 21(2) of the Code is not only related to the debt but also the existing relationship between a related party financial creditor and the corporate debtor. It is important to observe that the default rule states that only those financial creditors that are the related parties in the present would be disqualified from being included in the CoC. In the facts of this case, the relationship between the parties did not attract the prohibition as mentioned in the provision but the Court affirmed the decision of the NCLAT wherein it excluded Spade and AAA from the CoC due to their unfair means to enter the CoC. Accordingly, the Supreme Court dismissed the appeal. 


The definition of financial debt is an inclusive and not an exhaustive definition, hence, the judiciary has the power to interpret and consider other situations which may be included as financial debt. The ruling in the case of Phoenix Arc Pvt. Ltd. v. Spade Financial Service Ltd is a welcomed step in the ongoing process to clear the legislation provided in a short period, but still, some loose ends remain to be unanswered. This case also explains what constitutes financial debt under the Code. Further, it would also be interesting to look at how a financial institution may include an operational debt or partly operational or partly financial.


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