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How Tribunals Decide What Qualifies as Financial Debt under the IBC: Deposits, Guarantees and Assured Returns
Two creditors may be owed identical sums by the same company and yet occupy entirely different positions in its insolvency: one sits on the committee of creditors and votes on the resolution plan, while the other does not. The dividing line is whether the debt qualifies as financial debt under the IBC under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (“IBC”). This article examines the tests tribunals apply to transactions that generate many of the disputes, including security deposits, guarantees, assured-return arrangements and inter-corporate transfers.
The Two-Part Test
Section 5(8) defines financial debt as a debt along with interest, if any, which is disbursed against the consideration for the time value of money, and then lists particular categories in clauses (a) to (i).
In Anuj Jain, IRP for Jaypee Infratech Ltd. v. Axis Bank Ltd., (2020) 8 SCC 401, the Supreme Court set out the essential requirements: there must be a disbursal, and that disbursal must be against consideration for the time value of money. A claim that satisfies one but not the other fails.
In Global Credit Capital Ltd. v. Sach Marketing Pvt. Ltd. (Supreme Court, 25 April 2024), the Court added the method: the real nature of the transaction is to be ascertained from the agreements read as a whole and the surrounding circumstances, rather than from the label the parties used.
Applying the Test to Common Arrangements
Security deposits. A deposit placed under an agreement that also provides for services may still be financial debt if, on the documents, it carries an assured return for the use of money over time. That was the position in Global Credit Capital. A deposit that is purely a performance security, refundable without any return, ordinarily is not.
Guarantees and security given by the corporate debtor. Where a company mortgages its property to secure a third party’s loan but receives nothing itself, the lender is not its financial creditor: Anuj Jain. Liability under a guarantee given by the corporate debtor in respect of a financial debt falls within Section 5(8)(i), so a lender that has disbursed to the principal borrower and holds the corporate debtor’s guarantee stands differently from one that merely holds its security.
Interest-free loans. The absence of interest is not decisive. In Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd., (2023) 3 SCC 753, an interest-free term loan for working capital was held to be financial debt.
Assured returns in real estate. Arrangements under which a developer promises a fixed monthly return until possession have been treated as having the commercial effect of a borrowing. Separately, allottees under a real estate project are financial creditors by force of the Explanation to Section 5(8)(f).
Advances for goods or services. These are ordinarily operational debt under Section 5(21). An advance can cross over only if the arrangement has the commercial effect of a borrowing.
Inter-corporate transfers within a group. These are examined closely. The questions are whether money actually moved to the corporate debtor, how both companies recorded it, what return was agreed, and whether the creditor is a related party under Section 5(24). A related-party financial creditor has no right of representation, participation or voting in the committee of creditors under the first proviso to Section 21(2).
Evidence of Financial Debt under the IBC
The following documents can help establish whether a transaction qualifies as financial debt under the IBC:
- The agreement, its recitals and any board resolutions;
- the treatment in the audited financial statements of both parties, including classification as borrowings;
- bank statements evidencing the disbursal;
- correspondence about repayment, rollover or interest; and
- in claims filed in a CIRP, the proof of claim and supporting documents required under the CIRP Regulations.
Why Classification Matters
| Consequence | Financial creditor | Operational creditor |
|---|---|---|
| Initiating a CIRP | Section 7 | Section 9, after a Section 8 notice; barred by a plausible pre-existing dispute |
| Committee of creditors | Member, with vote, unless a related party | No vote |
| Minimum under a plan | Section 30(2)(ba) if dissenting: the lower of liquidation entitlement or a Section 53(1)-based share | Section 30(2)(b): the higher of those two measures |
| Liquidation waterfall | Unsecured financial creditors under Section 53(1)(d) | Residual category under Section 53(1)(f) |
Changes with Effect from 26 May 2026
The Insolvency and Bankruptcy Code (Amendment) Act, 2026 did not change the definition of financial debt, but it affects how these disputes are conducted:
- Section 5(28) now measures voting share by reference to the financial debt owed to members of the committee of creditors who are eligible to vote.
- Explanation II to Section 7(5) makes a record of default with an information utility, filed by a financial institution with its application, sufficient for the Adjudicating Authority to ascertain default.
- Section 215(3) and (4) require operational creditors to file financial information with an information utility before applying under Section 9, and treat information as authenticated if the debtor does not respond within the specified period.
- Section 18(b), as amended, expressly requires the interim resolution professional to verify claims and, where required, determine their value.
Practical Points
- Document the commercial substance at the time of the transaction; reconstructing it later rarely persuades a tribunal.
- Consistency between the two parties’ books carries weight.
- A creditor whose status is doubtful should file its claim in the appropriate form and press the point before the resolution professional, since the classification determines whether it has a vote at all.
Frequently Asked Questions
1. What is financial debt under the IBC?
Financial debt is defined under Section 5(8) and generally requires disbursal against consideration for the time value of money.
2. Does an interest-free loan qualify as financial debt?
Yes. An interest-free loan can qualify as financial debt if the transaction satisfies the requirements of Section 5(8).
3. Can a security deposit be financial debt?
Yes, depending on the terms and commercial substance of the transaction, particularly where it carries an assured return.
4. Why does financial creditor status matter?
Financial creditor status can determine eligibility to initiate CIRP under Section 7 and participation and voting rights in the CoC.
Legal Information Disclaimer
This article provides general information about Indian law as it stood on 16 September 2026. It is not legal advice, and reading it does not create an advocate–client relationship. Statutes, rules and judicial interpretations change, and their application depends on the facts of each matter. Readers should consult the current official text of the laws and judgments cited and should not act on this information without advice specific to their circumstances. This article is published for legal awareness and education and is not intended to advertise or solicit professional work.
Sources / Authorities
- Insolvency and Bankruptcy Code, 2016 — Sections 5(7), 5(8), 5(21), 5(24), 5(28), 7, 9, 18, 21, 30, 53, 215 (as amended) — IBBI – Legal Framework
- Insolvency and Bankruptcy Code (Amendment) Act, 2026 (No. 6 of 2026) — Gazette text (IBBI); Notification S.O. 2625(E) dated 22 May 2026 — IBBI
- Anuj Jain, IRP for Jaypee Infratech Ltd. v. Axis Bank Ltd., (2020) 8 SCC 401, Supreme Court of India
- Global Credit Capital Ltd. v. Sach Marketing Pvt. Ltd., Supreme Court of India, 25 April 2024
- Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd., (2023) 3 SCC 753, Supreme Court of India, 26 July 2021
- Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416, Supreme Court of India
