Whether put option holders are Financial Creditors or not – Mr. Pulkit Joshi

Whether put option holders are financial creditors or not

By Mr. Pulkit Joshi, Student of Amity University Jaipur


A put option allows the holder to sell an asset at a predetermined price within a specific timeframe. It is usually done in shares and stokes. All this activity is done even in the period of the corporate insolvency resolution process now in these 2 question arises that whether using the put option is a violation of SECTION 14 of the IBC code or not and whether the put option holder is a financial creditor or not.


Moratorium plays a significant role in the resolution process it prohibits several kinds of activities but Put Option is an exception here during the corporate insolvency resolution process the creditor can exercise this application and these kinds of things mostly done by the creditor when they realize the value of the shares will be decreased by the time for an example if I hold a put option a basic price will already be set, say Rs. X and I will be able to sell underlying stokes, say a 100 shares with specific period let’s take it as 30 days. So at the end of 30 days, I have the right [NOT OBLIGATION] to sell the 100 shares at Rs. X per share such option is useful where I believe that price of those shares will drop below X in those 30 days.

In the judgment of Jignesh shah v. Union of India[i], a three-judge bench of the Hon’ble Supreme Court quashed the NCLAT judgment of Puspa Shah v. IL&FS Financial service Ltd[ii] and Original Judgment of NCLT[iii] and [La-Fin Judgments]. The judgment from both the court is being rejected on the basis that corporate debtor claim was time-barred and corporate debtor want initiation of insolvency proceedings on the basis that put option holder may be treated as financial creditor.

The appeal that was made in the case of Jignesh shah was filed by the shareholder of LA-Fin Financial service and the order was assailed by the NCLT that was being upheld by the NCLAT by admitting the application under section 7 of the code to start the corporate resolution process against the La-Fin. The important factor of the petition was a letter of undertaking dated 20 august, 2009 provide to IFIN by the La-Fin. The letter of undertaking was effectively like a Put Option. The undertaking stated that

La-Fin or its nominees that are being appointed would be offered to purchase from IFIN’s investment in MCX stoke exchange after a period of one year but before the 3 years from the date of IFIN’S investment in MCX-SX at the price that is being provided at the rate of return of 15% to IFIN.

IFIN tried to exercise this option in august 2012 and called the La-fin to make the purchase of a share by the letter of an undertaking but La-Fin denied the legal and contractual obligation to buy any kind of share after this IFIN filed the winding-up petition under the companies act, 1956 on grounds of that La- Fin is unable to pay its debts and after that, the petition was transferred to NCLT under section 7 of the code.


The NCLT and subsequently the NCLAT have to answer whether the above transaction would constitute any kind of financial debt under section 5(8) of the code. La-fin argued that that the letter of undertaking was mere a letter of comfort there was no disbursement against the value of money and as per this reasoning the claim does not fall within the definition of the financial debt but the NCLT and the NCLAT both rejected this reasoning or contention.

NCLT interpreted the definition of financial debt and said that Financial debt is of two type one which is disbursed against the value of the money and the second one is the amount that is being raised by the transaction that is having any kind of commercial effect on the borrowing and in this case, it was held that an amount that has been raised with an objective of economic or commercial gain should be treated as Financial Debt.


Jignesh shah and Pushpa shah as a stakeholder of la fin the petitioner did go into the merit of the case but they raised only the issue that is related to the statutory bar of limitation against IFIN. The petitioner said that in light of the SC decision in BK Educational Services Pvt. Ltd vs. Parag Gupta and Associates[iv] it was said that the limitation act 1963 would apply to all the section 7 applications under the code and the present would petition would be time-barred as the original winding was filed in October 2016. The contention was accepted by the S C and the appeal was said yes that the winding-up petition was time-barred and could not proceed.


The Hon’ble Supreme Court recently pronounced a judgment in which it is said that the third party transaction will not be amounting to any kind of financial debt within the meaning of section 5(8) the name of the judgment is Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited Vs. Axis bank Limited Etc.[v]. The S C in Anuj Jain as well as Swiss ribbon Pvt. Ltd vs. union of India[vi] has clarified the meaning of financial creditor. The court that financial creditor is direct engaged in the functioning of the activity.

IBC says that financial debt is that debt that is due to a financial creditor but there is a difference between them both. The apex court said that there is a difference a mere debt and a financial debt is not the same thing there are differences like time value of money and in this case, it was concluded that the third party would fall under the ambit of the debt but not in the scope of the financial debt however it must be taken care that Anuj Jain focused on the mortgage debt where here the third party must be understood as an exceptional case.

 Put option as a contract of guarantee

As per the section 5(8) and (1) of the IBC, the financial debt includes the amount raised by any other transaction including any sale or forward sale or any kind of purchase agreement which have a commercial effect of borrowing. The Bombay high court in the case of Vandana Global ltd v. IL FS financial service[vii] it was held that the integrant of the contract of the guarantee are present in the option agreement which was reflected from that different nature there is a bar perusal that in every contract the essential element is to perform or discharge the liability of the third person in the case of default. In the Union bank of India vs. Infra Engineering Pvt Ltd[viii], the NCLT placed reliance on Vandana global. NCLT recommended that a deed of guarantee or any kind of loan agreement provided in the form of the put option indicates that the commercial effect of the borrowing facilities on the loan transaction.


The la fin judgment was a really important precedent for the IBC in the field of financial debt. As by the judgment, it is said that put-option holders are financial creditors under the IBC. Meanwhile, the Hon’ble Supreme court set aside the La-Fin judgment only on the one question of limitation. The SC court did not express or discussed any view on the la fin judgment but by the NCLT and NCLAT merged decision with the SC decision is can be amount to effective and enforceable. However, the reasoning of the various decisions of the NCLT and NCLAT resound with the other decision of the NCLT, High Court, and Supreme Court about put-option transactions. In the case of Union Bank of India v. Era Infra Engineering[ix], the NCLT mentioned that any debt obligation arising out of deed of pledge, a promoter’s undertaking, a non-disposal undertaking, and a put-Option would qualify as a ‘Contract of guarantee’ and the same would fall under the ambit “Financial Debt” under the IBC and as I mentioned earlier also in the case of Vandana Global Ltd.  Which was given by the Bombay High Court and found a Put-Option to be “nothing but a guarantee”


[i] Jignesh shah v. Union of India [2019] ibclaw.in 19 SC

[ii] Puspa Shah v. IL&FS Financial service Ltd WP (Civil) No. 455 of 2019.  

[iii] Original Judgment of NCLT CP 919/I&BC/NCLT/MB/MAH/2017.

[iv] BK Educational Services Pvt. Ltd vs. Parag Gupta and Associates [2018] ibclaw.in 32 SC.  

[v] Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited Vs. Axis bank Limited Etc.  [2020] ibclaw.in 06 SC.

[vi] Swiss Ribbon Pvt. Ltd vs. union of India Writ Petition [2019] ibclaw.in 03 SC.

[vii] Vandana Global ltd v. IL FS financial service 2018 SCC Online Bom 337.  

[viii] Union Bank of India vs. Infra Engineering Pvt ltd C.A. No 997(PB)/2018.

[ix] Union Bank of India v. Era Infra Engineering CA No. 997(PB)/2018 IN CP No. IB-190(PB)/2017 (NCLT Principal Bench, Order dated December 6, 2018).

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