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Global Credit Capital Limited & Anr. vs. Sach Marketing Pvt. Ltd. & Anr.

Not available · 2024 INSC 340Decided 25 Apr 2024
Not available
Justice Abhay S. Oka · Justice Pankaj Mithal

Background

A corporate debtor (a liquor company under insolvency proceedings) had appointed the respondent as a "Sales Promoter" under two service-agreement letters, each requiring the respondent to pay a large "security deposit" carrying 21% annual interest, far exceeding the small monthly promotion fee actually payable for the promotional work. When the corporate debtor entered insolvency, the resolution professional rejected the respondent's claim to be a financial creditor (entitled to a bigger say in the insolvency process), treating it instead as a mere operational creditor. The NCLAT held the respondent was a financial creditor; the resolution professional and other stakeholders appealed to the Supreme Court.

Decision Breakdown

The Supreme Court held that courts must look past the label given to a transaction and examine its true, real nature. Here, the "security deposit" bore no rational connection to the promotional services actually being paid for (which were compensated separately, at Rs. 4,000/month), instead, the deposit carried a high interest rate, was treated in the company's own books as a "loan"/"long-term liability," and TDS was deducted on the interest, showing it functioned as a disguised loan rather than a genuine security deposit tied to service performance. Because it had the "commercial effect of a borrowing" under Section 5(8)(f) of the IBC, the Court upheld the NCLAT's finding that the respondent was a financial creditor, not merely an operational creditor.

Lesson Learnt

In insolvency and lending disputes, courts look at the real economic substance of a transaction, not just what the paperwork calls it, dressing up what is really a loan as a "security deposit" under a service contract will not change its true legal character.

Official source (sci.gov.in)View Judgment (PDF)

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