Distinguishing Financial Debt from Operational Debt Under the IBC Framework
The Insolvency and Bankruptcy Code, 2016 (IBC), segments debt into two distinct categories: Financial Debt and Operational Debt . This classification determines the rights, roles, and remedies available to creditors within the Corporate Insolvency Resolution Process (CIRP). A recent judgment by the Supreme Court of India in Global Credit Capital Limited vs. Sach Marketing Pvt. Ltd. , 2024 SCC OnLine SC 649, addresses this critical classification, offering clarity on how certain transactions—such as a security deposit under a service agreement—may be treated under the IBC. The case underscores a foundational principle in insolvency law: it is not the label but the substance of the transaction that dictates its legal nature . Brief Factual Matrix One Mount Shivalik Industries Limited (Corporate Debtor, or CD) entered into a Sales Promoter Agreement with Sach Marketing Pvt. Ltd. (Sach). As part of this agreement, Sach deposited a security amount with the CD, with the understanding tha...