The Dilemma of the Time Value of Money post-2018 Amendment
By Dhruv Chhajed
(2nd year Student at Gujarat National Law University, Gandhinagar)
Insolvency and Bankruptcy Code (the “Code”) is gaining stability in the system as it has been fulfilling its role of restructure and reviving since 2016. Meanwhile, we are finding an increasing interaction between the Code and the Real Estate Act, 2016. In August 2018, an amendment was made to the Code, stating that the Home Allottees filling under IBC for remedy were to be deemed financial creditor.
Through this blog, the author has explored the fundamentals of the term ‘Financial debt’ and how the time value of money has a perplexing role post-2018 Code Amendment.
Role of Time Value of Money in Financial Debts?
The definition of the time value of money (“TMV”) as given in Black’s Law Dictionary, also referred in the Case of Nikhil Mehta v. AMR Infrastructure, as “Price associated with the length of time that an investor must wait until an investment matures or the related income is earned.”
Financial Debt as defined under Section 5(8)(f) provides that primarily two components must be present for an debt to be qualified as financial debt.
- The amount disbursed must be against time value of money “and”
- Should be any one type of the transactions between (a) to (i).
We can find the reflection of there being a time value of money in cases of clear consideration of money against credit facility or against payment of interest as seen in State Bank of India v. Advance Surfactants India.
Therefore it is indubitable to consider an amount as Financial Debt without “Time Value of Money”.
Critical Importance of TMV
It appears that TMV adds an extra element to the ordinary debt. A financial debt has to be treated differently from operational debt per se. There is some prima facie difference between Section 7 claim of financial debt and a Section 9 claim of Operational Debt. One of it was found in Anil Mahindroo & Anr v. Earth Organics Infrastructure, whereby the court stated if the amount portrayed the nature of loan, then the transaction amount has to be recognised as a financial debt. Secondly, it is beyond doubt that in a transaction of operational debt there lies no consideration of time value of money. Simply because of the reason that the amounts advanced for value of goods and services are mere security rather than a funding to the project.
Precedents holding TMV as an essential for Financial Debt.
As already stated, TMV is essential to determine financial debt as per Section 5 of the Code. Therefore, in the light of Divyansh Infracon case where there is no agreement or document showing consideration of interest against time value of money, there is no dispute to the fact that the amount cannot be claimed as financial debts. Similarly, Narayan Rao case also states that when the loan advanced is neither bearing interest nor consideration against time value of money, then the amount is deemed unfit to be a financial debt.
Strikingly NCLT in the Nikhil Mehta gave a judgment favouring builder, which got overruled by NCLAT. However, the judgement of the appellant body made it clear that the NCLT was not wrong on law but facts, and that the requirement of the time value of money is necessary for the financial debt.
Therefore the point of law that the claimant could not be said to be a financial creditor if the amount was not disbursed against time value of money as an element of financial debt is affixed. However, the Problem begins with the Legislature broadening the scope of financial debt and various judgments conceding with the same.
Legislature’s attempt to excluding TMV.
The legislature and creditors are moving forward with an approach to mellow down the impact of TMV. This has a huge impact on the real estate industry where;
Firstly, an ordinance and amendment of 2018 have given a deeming effect to the amounts raised by the allottee under a real estate project as a commercial effect of borrowing.
Secondly, in the case, Swiss Ribbons, Attorney General of India Mr Venugopal had put forth the intent of the legislature as the policy shift in not looking at the allottees applications under Section 7 through the lens of financial debt but as default. Therefore superseding the definitional problem and looking at the prima facie questions of default under the Code only.
Recent Precedent’s overlooking TMV as an essential to Financial Debt.
It is with the simultaneous judgements that have broadly adopted the legislative policy creating confusion. The court simply certifies the proceeds as financial debt and fit for the application under section 7 of the Code without applying the specific facts and terms of the agreement in each case.
For instance in Shinoy Koshy v. Granite Gate Properties, it was held that the mere purchasing of flats in a housing project makes the buyer a financial creditor and and can, therefore, initiate CIRP against the defaulting builder. In this case, the ground of default to refund the booking amount upon failure to give possession of flats on time was deemed sufficient to initiate CIRP. According to this ruling, the mere fact that there is a deemed commercial effect of borrowing makes the amount a financial debt under section 5(8)(f). In the scenario where there is no consideration of the second component i.e. TMV against the booking amount in the contract, the amount ipso facto becomes non-financial debt. This is a total disregard to the TMV under section 5(8)(f).
Similarly, Ruby Kumari v. Krishna Assets Developers stated that homebuyers who purchased residential flat are financial creditors and defaulting on refund creates a valid ground for initiation of CIRP, no further deliberation on the time value of money and the circumstantial facts of the case were made.
Lastly, Sunil Handa v. Today Homes Noida India held that solely on the ground that there is the default on the part of the developer/builder on refund of money or delivering of possession, the statutory position of the financial creditor gets automatically filled. The financial creditor is now directly associated to that of the allottee rather than the amount being a financial debt.
Looking at the above precedent’s it can be said that, it is either the deeming commercial effect or the money received from an allottee that makes the amount a financial Debt.
The impact created from this is the disparity created between different applicants. As noted above, the debts were allowed to be admitted even without TMV, whereas we have also noted multiple judgements indicating TMV as a pre-requisite for an application under Section 7 of the Code.
At the offset, problem does not glare itself out. It is only when the shell breaks, the true gravity of the lacuna created by courts can be understood. While on one hand, we have had tribunals/courts strongly applying and adhering to the requirements of Sec 5(8)(f) and making TMV an indispensable element. But on the other hand we have seen courts/tribunal taking a lenient approach on TMV following a chain of unavoidable conclusions after it i.e. amount being a financial debt and the person claiming it a financial creditor.
Therefore, there lies a lacuna on concretization and application of the law in the light of multiple theories prevalent in the current system. The problem being that two different sets of judgment going in two different directions, making the application of TMV even more unclear and a vague. What should be the weightage of the time value of money while ascertaining the claim of financial debt? has to be altogether reconsidered.
After going through majority of the existing jurisprudence on the said contention, it would not be unwise to take the definitional standard and consider TMV as an essential even in the light of compelling amendments. TMV is the sundering component between financial debt and operational debt. Overlooking such effects can have critical misinterpretations far worse for commerce and industry.
 Nikhil Mehta v. AMR Infrastructure, 2017 SCC OnLine NCLAT 859.
 § 5, Insolvency and Bankruptcy Code, 2016.
 State Bank of Indi v. Advance Surfactants India Ltd., (2019) 154 SCL 108.
 Anil Mahindroo & Anr v. Earth Organics Infrastructure, (2018) 147 SCL 0284.
 Divyansh Pratham Infracon Ltd. v. Dwarika Infocom Ltd., MANU/NC/2892/2019
 Katragadda Narayana Rao v.Avanti Leathers Ltd,  111 taxmann.com 521 (NCLT – Hyd.)
 Vishwanath Singh v. Visa Drugs & Pharmaceutical (P.) Ltd.  89 taxmann.com 5/ 145 SCL 304 (NCL -AT)
 Swiss Ribbons v. Union of India, (2019) 4 SCC 17.
 Shinoj Koshy v. Granite Gate properties Ltd,  152 SCL 125.
 Ruby Kumari v. Krishna Assets Developers,  112 taxmann.com 346 (NCLT – New Delhi).
 Sunil Handa v. Today Homes Noida India Ltd.,  108 taxmann.com 517 (NCLT – New Delhi).
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