The petitioner, Manwaari Lal, acting through his proprietary concern Manwaari Photo Co., filed a petition under Section 7 of the IBC seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against Nobivi

The issue in the given question is whether an interest-bearing security deposit paid under a commercial distribution agreement qualifies as "financial debt" under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC), thereby enabling initiation of CIRP under Section 7. Section 5(8) of the Insolvency and Bankruptcy Code, 2016 defines "Financial Debt" which means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes: money borrowed against the payment of interest; any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent; any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument; the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed; receivables sold or discounted other than any receivables sold on nonrecourse basis; any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing; any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account; any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution; the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause [Section 5(8)]. In the given case, the security deposit of ₹ 5 crore was refundable upon termination of the agreement and accrued interest at 20% per annum. The key factor here is the accrual of interest, which signifies the 'time value of money'. Yes, an interest-bearing security deposit made under a commercial distribution agreement qualifies as 'financial debt' under Section 5(8) of the Insolvency and Bankruptcy Code, 2016, thereby enabling the creditor to initiate the Corporate Insolvency Resolution Process (CIRP) against the corporate debtor. Case Law Reference: NCLT, New Delhi Bench vide its order dated 11th October 2021 in case of Magicon Impex Pvt. Ltd observed that, the amount which has been released pursuant to Agreement in the form of Security Deposit and the same is interest bearing, which means it is carrying consideration of time value of money having commercial effect of a borrowing. Therefore, in our view the "debt" claimed is a "Financial Debt" within the definition of Section 5(8)(f) of Insolvency and Bankruptcy Code, 2016.