In a landmark ruling, the Supreme Court has provided comprehensive guidance on the classification of financial debt under the Insolvency and Bankruptcy Code (IBC). The Court has laid down a two-pronged test to determine whether a debt qualifies as a financial debt under Section 5(8) of the IBC. This test involves satisfying the initial requirement of a debt with interest against the time value of money and fulfilling the conditions under Clause (f) of Section 5(8), which includes transactions having the commercial effect of borrowing.

The Court’s ruling has significant implications for the insolvency resolution process, as it clarifies the distinction between financial and operational debts. This distinction is crucial for creditors’ participation, voting rights, and distribution of proceeds during the resolution process. The judgment also provides valuable guidance to corporate debtors, creditors, resolution professionals, and adjudicating authorities, enabling them to navigate the complexities of debt classification more effectively.