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What “Time Value of Money” Means for Financial Debt under the IBC
Whether a creditor is a “financial creditor” decides who controls an insolvency: only financial creditors sit on the committee of creditors and vote on a resolution plan. The gateway to that status is Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (“IBC”), which defines financial debt as a debt along with interest, if any, disbursed against the consideration for the time value of money. The phrase is not defined in the Code, and tribunals have had to determine how the time value of money under the IBC operates and how far it extends beyond ordinary interest.
The Statutory Test
Section 5(8) has two limbs: the opening words, which state the general test, and clauses (a) to (i), which list particular categories, including money borrowed against payment of interest, amounts raised under acceptance or note purchase facilities, lease or hire purchase liabilities with the accounting treatment specified, receivables sold or discounted, and liabilities under guarantees or indemnities for any of the above.
In Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. v. Axis Bank Ltd., (2020) 8 SCC 401, the Supreme Court explained that for a debt to be financial debt there must be a disbursal, and the disbursal must be against consideration for the time value of money. A person who merely holds security for another’s debt, without any disbursal to the corporate debtor, is not a financial creditor.
Can Financial Debt Exist Without Regular Interest?
Difficulties arise where money has been advanced without stipulated interest but the lender receives some other advantage.
- In Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd., (2023) 3 SCC 753, the Supreme Court held that an interest-free term loan advanced to meet working capital needs is a financial debt, since Section 5(8) covers a debt “along with interest, if any“.
- In Global Credit Capital Ltd. v. Sach Marketing Pvt. Ltd. (Supreme Court, 25 April 2024), the Court held that the real nature of the transaction must be ascertained from the documents and surrounding circumstances; on the facts, security deposits placed with the corporate debtor which carried an assured return were treated as financial debt.
- In Arunkumar Jayantilal Muchhala v. Awaita Properties Pvt. Ltd. & Anr. (NCLAT, 2 April 2024), the Appellate Tribunal observed that the time value of money is not confined to a regular or timely return for the period of the disbursal, but also covers any other form of benefit or value accruing to the creditor as a return for providing money for a long duration.
Taken together, these decisions indicate that the test is economic rather than formal: the question is whether the money was given in return for value that reflects the passage of time, not whether the document uses the word “interest”.
What Is Not Financial Debt Under the IBC?
Equally, the label chosen by the parties does not decide the matter.
- Money advanced with no return element, and no commercial arrangement reflecting the use of money over time, is unlikely to qualify.
- An advance for the supply of goods or services is operational debt, not financial debt, unless it has the commercial effect of a borrowing.
- Where a party’s claim is based only on a guarantee or security given by the corporate debtor without any disbursal to it, Anuj Jain applies.
- Allottees under a real estate project are financial creditors only because the Explanation to Section 5(8)(f) deems their advances to have the commercial effect of a borrowing.
Why the Classification Matters
| Consequence | Financial creditor | Operational creditor |
|---|---|---|
| Initiating CIRP | Section 7; no demand notice required | Section 9, after a Section 8 demand notice, subject to pre-existing dispute |
| Committee of creditors | Member with voting rights (Section 21) | No vote; may attend in certain cases |
| Minimum under a plan | Section 30(2)(ba), if dissenting | Section 30(2)(b) |
| Liquidation waterfall | Unsecured financial creditors in Section 53(1)(d) | Residual category in Section 53(1)(f) |
Changes from 26 May 2026
The Insolvency and Bankruptcy Code (Amendment) Act, 2026 did not alter the definition of financial debt, but three related changes affect disputes of this kind:
- Proof of default. Explanation II to the substituted Section 7(5) provides that where a financial institution files a record of default from an information utility, that record is sufficient for the Adjudicating Authority to ascertain default.
- Grounds for rejection. Explanation I to Section 7(5) states that where default, completeness and the absence of disciplinary proceedings against the proposed resolution professional are established, no other ground shall be considered to reject the application. The question whether the applicant is in fact a financial creditor remains part of establishing default on a financial debt.
- Voting share. Section 5(28) now defines voting share by reference to the financial debt owed to members of the committee of creditors who are eligible to vote, which matters where related-party creditors are excluded.
Practical Points
- The documents matter: loan agreements, board resolutions, accounting treatment in the books of both parties and correspondence are all used to identify the real nature of a transaction.
- An assured return, a premium on repayment, a share of revenue or a conversion right may each supply the time value element even where no interest is charged.
- Decisions of the NCLAT are persuasive across benches but turn on their facts; the Supreme Court decisions in Anuj Jain, Orator Marketing and Global Credit Capital remain the controlling authorities.
FAQ
What is financial debt under the IBC?
Financial debt under Section 5(8) IBC is debt disbursed against consideration for the time value of money, including specified categories of transactions.
Is an interest-free loan a financial debt?
Yes. In Orator Marketing, the Supreme Court held that an interest-free term loan can qualify as financial debt because Section 5(8) uses the words “interest, if any”.
What does time value of money mean under the IBC?
It refers to value received by a creditor in return for providing money over time. It is not necessarily limited to a conventional interest payment.
Is every advance a financial debt?
No. The nature and terms of the transaction matter. An advance without a return element or commercial borrowing arrangement may not qualify as financial debt.
Why does financial creditor status matter?
Financial creditor status affects the right to initiate CIRP under Section 7, participate and vote in the Committee of Creditors, and the treatment of claims under a resolution plan or liquidation.
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(20), 5(21), 5(28), 7, 21, 30, 53 (as amended) — IBBI – Legal Framework
- Insolvency and Bankruptcy Code (Amendment) Act, 2026 (No. 6 of 2026) — Gazette text (IBBI)
- Anuj Jain, IRP for Jaypee Infratech Ltd. v. Axis Bank Ltd., (2020) 8 SCC 401, Supreme Court of India
- Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd., (2023) 3 SCC 753, Supreme Court of India, 26 July 2021
- Global Credit Capital Ltd. v. Sach Marketing Pvt. Ltd., Supreme Court of India, 25 April 2024
- Arunkumar Jayantilal Muchhala v. Awaita Properties Pvt. Ltd. & Anr., NCLAT, New Delhi, 2 April 2024 — summary, IBC Laws
Advocate Aaditya Bhatt
Senior Standing Counsel Income Tax Department, Advocate Gujarat High Court. Aaditya combines his technical and legal expertise to deliver strategic counsel in litigation, constitutional, and regulatory matters. He represents clients before High Courts and Tribunals with a technology-driven approach.
