Global Indian School Education Services Pvt. Ltd. Vs Abhay Narayan Manudhane (NCLAT Delhi)
National Company Law Appellate Tribunal (NCLAT) Delhi ruled in Global Indian School Education Services Pvt. Ltd. Vs Abhay Narayan Manudhane that a security deposit provided under a Memorandum of Understanding (MoU) without a commercial borrowing element does not constitute financial debt under the Insolvency and Bankruptcy Code, 2016 (IBC). The case revolved around whether the claim of the appellant should be classified as financial debt or another form of liability.
The appellant argued that the security deposit of ₹2.37 crore was provided to the corporate debtor to facilitate the development of school infrastructure. However, the corporate debtor failed to meet its obligations under the MoU, leading the appellant to claim that the deposit had transformed into financial debt. The appellant cited Clause 3.3 of the MoU, which mandated a refund of the deposit along with 9% interest in case of termination, to substantiate their claim. The appellant further relied on the precedent set in Global Credit Capital Limited to assert the transaction’s commercial effect of borrowing.
The respondent countered that the transaction lacked the time value of money, a key criterion for financial debt under Section 5(8) of the IBC. Referring to the Supreme Court’s decision in Pioneer Urban Land and Infrastructure Limited v. Union of India, the respondent argued that the security deposit was merely a refundable amount and did not reflect a borrowing transaction. The respondent also highlighted that the interest mentioned in the MoU was a penalty for non-refund and not a consideration for the use of funds.
The NCLAT upheld the respondent’s arguments, emphasizing that the security deposit, as recorded in the corporate debtor’s books, was classified as a current liability and not as a loan or advance. Furthermore, the tribunal noted that the appellant had not invoked Clause 22 of the MoU to terminate the agreement, weakening the claim of financial debt. The tribunal distinguished the case from Global Credit Capital Limited by noting the absence of an interest-bearing clause akin to a borrowing arrangement in the present matter.
The ruling aligns with prior decisions, such as Budhpur Buildcon Pvt. Ltd., where penal interest for non-refund of deposits was not recognized as financial debt. The NCLAT concluded that the security deposit did not meet the essential requirements under Section 5(8) of the IBC and dismissed the appeal. This judgment reinforces the principle that financial debt must involve a transaction with an evident commercial effect of borrowing, accompanied by a time value of money.
FULL TEXT OF THE NCLAT JUDGMENT/ORDER
