Put-option Holders - Financial Creditors Under the IBC

In its recent judgment in the case of Jignesh Shah v. Union of India[1] (Jignesh Shah), a three-judge bench of the Supreme Court set aside the NCLAT judgment in the case of Pushpa Shah v. IL&FS Financial Services Limited[2] (NCLAT Judgment) along with the original judgment of the NCLT[3] (NCLT Judgment and, together, La-Fin Judgments). The NCLT Judgment and the NCLAT Judgment had rejected the corporate debtor’s objection in relation to the claim being time barred and initiated corporate insolvency resolution process on the basis that a put option holder may be treated as a “financial creditor” under the Insolvency & Bankruptcy Code, 2016 (IBC).

Factual Background

The appeal in the case of Jignesh Shah was filed by the shareholders of La-Fin Financial Services Pvt. Ltd. (La-Fin) assailing the order of the NCLT (upheld by the NCLAT) admitting an application filed by IL&FS Financial Services Ltd. (IFIN) under Section 7 of the IBC to initiate the corporate insolvency resolution process against La-Fin.

The basis of the petition was a Letter of Undertaking, dated 20 August, 2009 (Letter of Undertaking), provided by La-Fin to IFIN. The Letter of Undertaking was effectively in the nature of a put-option. It stated that La-Fin or its appointed nominees would offer to purchase from IFIN its shares held in MCX Stock Exchange Limited, a group company of La-Fin (MCX-SX), after a period of one year, but before a period of three years, from the date of IFIN’s investment in MCX-SX, at a price that provided a minimum of an internal rate of return of 15% to IFIN. The Letter of Undertaking was executed simultaneously with a share-purchase agreement by way of which IFIN agreed to purchase equity shares of MCX-SX.

Accordingly, IFIN attempted to exercise this option in August, 2012 and called upon La-Fin to purchase the shares in accordance with the Letter of Undertaking. However, La-Fin by way of its letter, dated 16 August, 2016, denied its legal and contractual obligation under the Letter of Undertaking to buy the shares.

Consequently, IFIN filed a winding-up petition under the provisions of the Companies Act, 1956, against La-Fin in the Bombay High Court in October, 2016, on the grounds that La-Fin was unable to pay its debt to the sum of INR 232,50,00,000, which was due to IFIN as per the Letter of Undertaking. On the IBC coming into force, the petition was transferred to the NCLT as an application under Section 7 of the IBC.

The La-Fin Judgments

The NCLT and, subsequently, the NCLAT, examined, inter alia, the question of whether a transaction of the above nature would constitute a “financial debt” under Section 5(8) of the IBC. La-Fin contended that the Letter of Undertaking was a mere letter of comfort and there was no disbursement against consideration for time value of money made by IFIN to La-Fin. As such, La-Fin submitted that IFIN’s claim did not fall within the definition of financial debt.

Examining the definition of “financial debt” under the IBC, however, the NCLT and the NCLAT both rejected this contention.

Interpreting the definition of “financial debt” under Section 5(8) of the IBC, the NCLT stated, “…Financial Debt can be segmented into two types. One is disbursed against the consideration for the time value of money. The second is any amount raised under any other transaction having commercial effect of a borrowing. It is not necessary that there is always a “disbursement” of money… (sic)”[4] It held that in this case, an amount had been raised with an objective of economic gain or commercial effect and as such could be treated as “financial debt”.

The NCLT found that the purchase of shares in MCX-SX by IFIN was distinct from an investment because there was an assured return / commercial gain within a guaranteed period. That IFIN had not purchased shares in MCX-SX with the intent to hold rights in perpetuity was evident from the fact that there was a specified date by which the amount was to be repaid at a prescribed rate of return. As such, it was held that La-Fin had agreed to reverse the share-purchase transaction by purchasing the shares within a specified time along with the payment of 15% accrual, and this constituted financial debt under the IBC.[5]

The NCLAT upheld the judgment of the NCLT, reiterating that the amount had been raised for economic gain and has the commercial effect of borrowing, given that the terms of the transaction included not only the purchase of shares but also the date by which the amount was to be repaid. Additionally, there was an element of time value of money when one of the conditions related to an internal rate of return of 15%. Accordingly, the amount came within the ambit of “financial debt” and IFIN could claim as a financial creditor under the IBC.[6]

The Supreme Court Jignesh Shah v. Union of India [7]

Subsequently, Jignesh Shah and Pushpa Shah as shareholders of La-Fin assailed the La-Fin Judgments before the Supreme Court. The petitioners did not go into the merits of the case, but raised only the issue of the statutory bar of limitation against IFIN.

The petitioners contended that in light of the Supreme Court’s decision in B.K. Educational Services Pvt. Ltd. v. Parag Gupta and Associates[8], the Limitation Act, 1963 would apply to all Section 7 applications under the IBC and the present petition would be time-barred, as the original winding up petition had been filed in October, 2016, beyond the prescribed period of three years from the cause of action (which arose in August, 2012).[9] This contention was accepted by the Supreme Court and the appeal was allowed, holding that the winding-up petition was time-barred and could not be proceeded with. Accordingly, the La-Fin Judgments were set aside.

Where do put-option holders stand?

The La-Fin Judgments set an important precedent under the IBC in relation to the meaning of “financial debt” under the IBC and the types of transactions that could fall within its ambit. The La-Fin Judgments had expressly recognised put-option holders as “financial creditors” under the IBC.

The Supreme Court set aside the La-Fin Judgments solely on the question of limitation. The Supreme Court did not discuss, touch upon or express any view on the La-Fin Judgments’ analysis and findings on the matter of debt obligations emanating out of put-option agreements constituting a “financial debt” under the IBC. However, the NCLT and NCLAT decisions have merged with the Supreme Court’s decision, which alone is effective and enforceable.[10]

However, the reasoning set out in the NCLT and NCLAT decisions resonates with other decisions of the NCLT, High Court and Supreme Court in relation to put-option transactions.  In Union Bank of India v. Era Infra Engineering[11], for instance, the NCLT held that a debt obligation arising out of a put-option, a non-disposal undertaking, a promoter’s undertaking and a deed of pledge would qualify as a “contract of guarantee” and would fall under the ambit of “financial debt” under the IBC. Similarly, in Vandana Global Limited v. IL&FS Financial Services Limited[12], the Bombay High Court found a put-option to be “nothing but a guarantee”.

Significantly, even in the landmark decision of Pioneer Urban and Infrastructure Limited v. Union of India[13], the Supreme Court interpreted the provisions of Section 5(8)(f) of the IBC in a manner similar to that done in the La-Fin Judgements, stating that the provision “would subsume within it amounts raised under transactions which are not necessarily loan transactions, so long as they have the commercial effect of a borrowing…so long as an amount is “raised” under a real estate agreement, which is done with profit as the main aim, such amount would be subsumed within Section 5(8)(f) as the sale agreement between developer and home buyer would have the “commercial effect” of a borrowing, in that, money is paid in advance for temporary use so that a flat/apartment is given back to the lender”.[14]

In light of the above, while the precedential value of the La-Fin Judgements has been blunted in view of the Supreme Court’s decision in Jignesh Shah, the said decision is unlikely to affect similarly placed put-option holders’ ability to successfully maintain an action under the IBC as “financial creditors”, provided the same is brought within the prescribed period of limitation.


[1] WP (Civil) No. 455 of 2019

[2] Company Appeal (AT) (Insolvency) No. 521 of 2018 

[3] CP 919/I&BC/NCLT/MB/MAH/2017

[4] Para 11.1, NCLT Judgment. The point on disbursement is in line with the holding of the NCLAT in B.V.S. Lakshmi v. Geometrix Laser Solutions Private Limited (Company Appeal (AT) (Insolvency) No. 38 of 2017, para 29), where it was held that for the purpose of showing that there is a debt due which was disbursed against the ‘consideration for the time value of money’, it is not necessary to show that an amount has been disbursed to the Corporate Debtor.

[5] Paras 11,2, 11.4, NCLT Judgment

[6] Para 18, NCLAT Judgment

[7] WP (Civil) No. 455 of 2019

[8] 2018 SCC OnLine 1921

[9] Para 4, Jignesh Shah

[10] Kunhayammed v. State of Kerala, AIR 2000 SC 2587

[11] CA No. 997(PB)/2018 in CP No. IB-190(PB)/2017 (NCLT Principal Bench, Order dated December 6, 2018).

[12] 2018 SCC OnLine Bom 337

[13] WP (Civil) No. 43 of 2019

[14] Id, paras 66-67.