India: NCLAT Adjudicates On ‘Time Value Of Money'


India's new Bankruptcy Code, akin to several other jurisdictions, is a creditor in possession/control model. In other words, financial creditors control key decisions made during the process of corporate insolvency resolution. Therefore, being a financial creditor has its advantages. A financial creditor is identified in the Insolvency and Bankruptcy Code, 2016 (the Code) to mean any person to whom a financial debt is owed and includes a person to whom such financial debt has been legally assigned or transferred to. In this context, it becomes important to understand what the term 'financial debt' means. Having modelled the construct of 'financial debt' from the Asia Pacific Loan Market Association, the Code identifies this term to mean debt along with interest, if any, which is disbursed against the consideration for the time value of money. The identification of a financial debt, and consequently, whether a financial creditor's petition is maintainable was first brought to test in the case of Nikhil Mehta and others (Applicants) vs AMR Infrastructure Ltd (Corporate Debtor) before the National Company Law Tribunal (NCLT), Delhi, which was subsequently heard by the National Company Law Appellate Tribunal (NCLAT) on appeal. In this Ergo, we distinguish the findings of the NCLAT from the order pronounced by the NCLT in this case.

NCLT Position

As elucidated in our Ergo Newsflash dated 10 February 2017, a petition for insolvency resolution under the Code was filed against the Corporate Debtor for failing to pay 'Assured Returns'. 'Assured Returns', as per the memoranda of understanding entered among the Corporate Debtor and the Applicants (at the time of booking of real estate units), was the sum of money that the Applicants were promised to be paid on a monthly basis until the possession of real estate units booked by them was handed over. The Applicants had argued that since the amount was in the form of an 'Assured Return', the failure to make such payment entitled the Applicants to initiate the corporate insolvency resolution against the Corporate Debtor under the Code as financial creditor.

The NCLT noted that an important consideration to determine whether a debt is a financial debt is that it must be 'disbursed' against the 'time value of money' or the price associated with the time that an investor must wait until an investment matures or related income is earned. The NCLT also considered the fact that the underlying transaction in this case was more in the nature of a sale of goods rather than debt, and concluded that this transaction of purchase of property and that an amount of return promised in connection to it does not acquire the nature of a financial debt. It was on these grounds that the NCLT dismissed this application. 


The Applicants approached the NCLAT by preferring a statutory appeal against the order of the NCLT. It was argued by the Applicants before the NCLAT that the concept and plan of payment of 'Assured Returns' by real estate developers such as the Corporate Debtor is a method adopted by them to mobilise funds/raise finance from the public at much lower rates than what is normally made available to them by banking and other financial institutions without having the obligation to offer security or any collateral. It was also argued that this transaction tantamounted to a collective investment scheme (as identified in the Securities Exchange Board of India Act, 1992) and that the developer could be said to be engaged in a fund mobilization activity by offering assured returns. The NCLAT was also apprised of the fact that these 'Assured Returns' were identified as commitment charges in the books of accounts of the Corporate Debtor, under the head of 'Financial Costs'.

Another ground that was used by the Applicants to assert their position as financial creditors was that the Corporate Debtor was deducting tax deductible at source (TDS) on the amounts being paid to the Applicants as 'Assured Returns' under Section 194(A) of the Income Tax Act, 1961, which is applicable to the deduction of TDS on the amount which is paid as 'interest, other than interest on securities'. The Applicants therefore argued that that these 'Assured Returns' were in fact interest payments being made by the Corporate Debtor thereby making the amount paid by the Applicants to the Corporate Debtor a loan.

The NCLAT reasoned, from a review of the memoranda of understanding, that the Applicants were indeed investors and had chosen a committed return plan and that this monthly committed return tantamounted to a debt as identified in Section 3(11) of the Code. Further, having considered the arguments advanced by the Applicants and having observed the material on record, the NCLAT ruled that the Corporate Debtor treated the Applicants as 'Investors' and borrowed the amounts for their commercial purposes, treating it at par with a 'loan'. Thereby, the amount invested by the Applicants does come within the meaning of 'financial debt' as identified in Section 5(8)(f) of the Code.

On the question of whether this financial debt satisfies the 'time value of money' criterion, the NCLAT considered the sale and purchase agreement entered into with the Corporate Debtor. The agreement contemplated the completion of construction and subsequent handover of shops in the shopping mall before a specified date. As the Applicants had paid most of the amounts, the Corporate Debtor was ready to pay them 'Assured Returns'. For every calendar month, the Corporate Debtor undertook to pay a fixed amount till the date of handing over of possession. It was for this reason that the NCLAT concluded that the amount disbursed by the Applicants was in fact against the consideration for the time value of money and the Corporate Debtor raised the amount by way of a sale purchase agreement, having the commercial effect of a borrowing. Therefore, the NCLAT allowed this appeal and admitted the petition by reasoning that the NCLT, while rightly interpreting the provisions of law to understand the meaning of the expression 'financial creditor' erred in appreciating the nature of transactions in the present case and wrongly came to a conclusion that 'it is a pure and simple agreement of sale and purchase of property which does not have the same effect as an amount disbursed against the consideration for the time value of money'. 


It is noteworthy that the principles of law discussed by both the NCLT and the NCLAT are consistent. However, the NCLAT has interpreted the facts of this case differently, leading to a different conclusion. It is quite likely that this and other similar cases will see the light of day before the Supreme Court to settle the positions in contention. This has far reaching implications not just limited to the constitution of the committee of creditors.

This judicial interpretation of 'the time value of money' in the context of financial debt puts other complex financial debt instruments whose returns are linked to parameters observed in equity transactions into question. The NCLT in its order does state that there exist "complex financial instruments" in the market and that it would not be "a happy situation to decipher the true nature and meaning" of such transactions. This decision will result in greater scrutiny on whether debt like instruments such as redeemable preference shares, put and call options on securities, etc. will satisfy the definition of financial debt.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

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