Global Credit Capital v. Sach Marketing: financial vs operational debt

The facts in brief

Sach Marketing Pvt. Ltd. entered into agreements, in 2014 and 2015, with the corporate debtor — a beer manufacturer — under which Sach was appointed as a "Sales Promoter" to promote the corporate debtor's products for a twelve-month term. A condition of each agreement required Sach to place a "security deposit" — around ₹53.15 lakh — with the corporate debtor, on which the corporate debtor agreed to pay interest at 21% per annum.

When the corporate debtor was admitted into the Corporate Insolvency Resolution Process (CIRP), Sach filed its claim as a financial creditor, asserting that the interest-bearing deposit was, in substance, a borrowing. The resolution professional and others contended that the amount was at best an operational debt — or not a financial debt at all — because it arose under a sales-promotion (service) contract, and that the "security deposit" was incidental to the provision of promotional services rather than money lent. The NCLT and the NCLAT took differing views on the classification, the question turning on whether the label or the interest-bearing substance of the arrangement should prevail. Global Credit Capital Ltd., another stakeholder, and the resolution professional carried the dispute to the Supreme Court. A two-judge bench of Justices Abhay S. Oka and Pankaj Mithal, in a judgment authored by Oka J, decided it on 25 April 2024.

The question

The Court had to decide whether an interest-bearing "security deposit" embedded in a service contract is a financial debt, an operational debt, or neither — and, more generally, to articulate the governing test for classifying a contested claim under the IBC. The stakes are substantial. Under the Code, a financial creditor sits on the Committee of Creditors, votes on the resolution plan, and helps decide the fate of the corporate debtor; an operational creditor, by contrast, generally has no vote and recovers only what the approved plan allots. The classification therefore governs not merely the priority of a claim but the distribution of control over the entire resolution — which is precisely why parties have an incentive to characterise the same payment as a financial debt or an operational debt depending on where advantage lies.

What the Court held

Substance, not the label, governs

The Court held that the real nature of the transaction, discerned from the substance of the written agreement rather than from the name the parties gave it, is determinative. A label of "security deposit," "advance," or "service fee" does not control the legal character of the claim; the court must look through the form to the commercial reality.

Operational debt requires a nexus with goods or services

A claim is an operational debt only if it has a direct nexus or correlation with the supply of goods or the provision of a service by the creditor to the corporate debtor — that is, where it arises out of the operational relationship itself. Absent such a nexus, the claim cannot be operational.

Financial debt: time value of money plus commercial effect of borrowing

A debt qualifies as a financial debt under Section 5(8) where it has been disbursed against the consideration for the time value of money and bears the commercial effect of a borrowing, even if the parties have called it something else. The two indicia — consideration for the time value of money, and the commercial effect of a borrowing — are the touchstones of financial debt.

The interest-bearing deposit was a financial debt

Applying the test, the Court held that the amount styled a "security deposit," placed by a party engaged as a sales promoter but carrying a fixed 21% per annum interest and used by the corporate debtor for the time value of money, was a financial debt — making Sach a financial creditor — notwithstanding that the underlying contract also engaged Sach to render promotional services. The interest-bearing deposit was severable in character from the service arrangement and bore the hallmark of a borrowing; the depositor was therefore entitled to be treated as a financial creditor, with a seat on the Committee of Creditors, rather than as an operational creditor.

The doctrinal architecture

Global Credit Capital supplies a principled, substance-over-form framework for the recurring CIRP dispute over creditor classification. Four propositions emerge. The real nature of the transaction in the written agreement governs, not its label. An operational debt requires a nexus with goods or services supplied to the corporate debtor. A financial debt is one disbursed for the time value of money with the commercial effect of a borrowing under Section 5(8). And a single contract can contain a severable financial-debt component — here, the interest-bearing deposit — distinct from its service component.

The classification is not a mere taxonomic exercise. It determines the composition and voting of the Committee of Creditors, and therefore who controls the resolution. By privileging substance over form, the decision disciplines attempts to dress up borrowings as deposits, or deposits as borrowings, to manipulate the CoC.

The reasoning also clarifies that a single instrument may have a hybrid character. Where a contract bundles a service engagement with a separate financial arrangement — here, an interest-bearing deposit sitting alongside a promotion mandate — the court is not required to force the whole into one category. It may identify a financial-debt component that is severable from the service component and treat it accordingly. That insight matters far beyond the facts of Sach Marketing: assured-return clauses in real-estate transactions, subvention arrangements in construction finance, and structured advances of many kinds all present the same problem of a payment that wears the dress of one category while bearing the economic substance of another. The Court's instruction is to read the agreement for what it does — whether money has been put at the disposal of the debtor for the time value of money, with the commercial effect of a borrowing — rather than for what it is called.

Trajectory

The judgment is now a leading authority on the financial-versus-operational debt dichotomy and is routinely invoked before the NCLT and NCLAT when classifying contested claims — security deposits, advances, subvention and assured-return arrangements, and hybrid contracts. It dovetails with the broader 2024 line refining Section 5(8) and feeds the continuing CIRP jurisprudence on creditor status and voting rights.

Practitioners treat it as the go-to test whenever the financial or operational character of a claim is in dispute, and it features in the 2024 IBC annual digests as a significant clarifying decision. Its substance-over-form discipline will continue to govern the classification of structured and hybrid claims as they reach the insolvency tribunals.

The decision sits within a broader 2024 line in which the Court continued to refine the contours of Section 5(8) and the financial-creditor concept — clarifying, in companion rulings, that a debt may exist for the purposes of the Code even in the absence of a default, and policing the boundary between genuine financial creditors and disguised related-party or operational claims. Read together, these decisions reflect a consistent judicial posture: the Code's categories are to be applied according to economic reality, and the tribunals are to look through contractual labelling and structuring designed to secure a more favourable position in the resolution. For lenders and counterparties drafting commercial arrangements, the practical lesson of Sach Marketing is that an interest-bearing advance will likely be treated as a financial debt however it is styled, while a payment genuinely tied to the supply of goods or services will remain operational — and that careful drafting cannot convert the one into the other where the substance points the other way.

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Sources

1. Verdictum — "Test To Determine Whether A Debt Is A Financial Debt U/S 5(8) IBC: Supreme Court Explains": https://www.verdictum.in/
2. LiveLaw — "Insolvency & Bankruptcy Code: Important Judgments By Supreme Court In 2024": https://www.livelaw.in/
3. SCC Times (Blog) — IBC digest entry for April 2024, Global Credit Capital v. Sach Marketing: https://www.scconline.com/blog/
4. Supreme Court Observer — case page, Global Credit Capital Ltd. v. Sach Marketing Pvt. Ltd.: https://www.scobserver.in/