Put Option Holders from the Scope of Financial Creditors – A Persisting Dilemma

  • Mudit Jain and Anjali A.

Introduction to the conundrum

The Supreme Court recently pronounced in Anuj Jain v. Axis Bank Ltd. & Ors., 2020 SCC Online SC 237, (hereinafter “Anuj Jain”), that third party security transactions would not amount to “financial debt” within the meaning of Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (“IBC”). The blanket verdict leaves the “put option” holders in a state of dilemma.

“Put option” has been defined by the Supreme Courtin Securities and Exchange Board of India v. Rakhi Trading Pvt. Ltd., (2018) 13 SCC 753,asa contract between a buyer and the seller, which “gives the buyer the right, but not obligation to sell a given quantity of underlying asset at a given price on or before a given future date.” The option holder pays a premium to the effect that when he exercises his option, the writer of the option is obliged to purchase the asset from the option holder. Thus, the decision in Anuj Jain has a direct impact on the interests of the “put option” holders.

Put Option Holders qualify as Financial Creditors

The Supreme Court, in Anuj Jain as well as in Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors., (2019) 4 SCC 17, had enunciated the meaning and role of “financial creditor” as envisaged in the code. The Court stated that there is no figment of doubt that a “financial creditor” is envisioned to hold a unique position in the functional existence of the corporate debtor insofar as he is a person directly engaged in the functioning, sustenance and growth of the corporate debtor. It was succinctly observed that a “financial creditor” is a person whose interests are inherently plaited in the health and well-being of the corporate debtor.

The Apex Court went on to observe that though a third party security holder is a secured creditor, he would stand outside the purview of a “financial creditor” because he only has a  security interest  over the property and  does not have direct involvement with the finances and growth of the corporate debtor. This being said, the Court drew such a distinction on the grounds that a mere security interest holder does not have any stake in the corporate debtor’s growth, rejuvenation, revival and/or equitable liquidation.

The IBC defines a “financial creditor” as any person to whom a “financial debt” is owed and thus it becomes pertinent to understand the meaning of “financial debt”.

The Apex Court drew a distinction between a mere debt and a “financial debt” by noting that for a debt to be qualified as a “financial debt” there should be a consideration for the time value of money, which, the Court observed, is absent in case of third party security transactions. Wherefore, it was concluded that a third party security would fall within the meaning and scope of debt but not a “financial debt”.

However, it is noteworthy that Anuj Jain was primarily focussed on mortgage debts whereas a “put option” should be understood as an exceptional form of third party security akin to a contract of guarantee having a specified price, tenure and rate of return attached to it. It is to be noted that certain specific third party security holders such as holders of “put option” fall directly within the ambit of “financial creditors” as they facilitate the existence and operation of a corporate entity by supplying the essential glucose in the form of funds. 

Put Option as a Contract of Guarantee

Per Sections 5(8)(f) and (i) of IBC, a “financial debt” includes any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing, and also the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in clause (8). 

The Bombay High Court, in Vandana Global Ltd. v. IL&FS Financial Services Ltd., [2018] 207 CompCas 668 (Bom), (hereinafter “Vandana Global”), held:

“Thus necessarily the ingredients of a contract of guarantee are clearly present in the option agreement which are reflected from the unambiguous nature of … the “Put Option” whereby the appellant has irrevocably, absolutely and unconditionally without demur or protest agreed to make payment of the exercise price to the respondent. If this be the case, then considering the provisions of Section 126 of the Contract Act, it is imperative to accept the ‘option agreement’ as a ‘contract of guarantee’. There can be no other interpretation.”

A bare perusal of Section 126 of the Indian Contract Act, 1872, clarifies that in every contract of guarantee the essential element is to perform the promise or discharge the liability of a third person in case of a default.

In Union Bank of India v. Era Infra Engineering Pvt. Ltd., C.A. No. 997(PB)/2018 in C.P. No. IB-190(PB)/2017, the National Company Law Tribunal (“NCLT”) placed firm reliance on Vandana Global and reiterated that a “put option” in a tripartite loan transaction satisfies all the ingredients of a contract of guarantee and hence, is within the scope of “financial debt” as defined in Section 5(8)(i) of IBC. Also, the NCLT reconfirmed that “financial debt” would include any transaction having a commercial effect of borrowing. Thus, a deed of guarantee or a loan agreement providing for a guarantee in the form of a “put option” clearly indicates the existence of commercial effect of borrowing as it facilitates the loan transaction.

Similarly, in the case of Pushpa Shah & Ors. v. IL&FS Financial Services Ltd. & Ors., [2019] 215 CompCas 391, where the share-purchase agreement was accompanied by a letter of undertaking to purchase the aforesaid shares at any time after a period of one year but before the end of three years from the date of investment along with a premium (effectively a “put option”), the National Company Law Appellate Tribunal (“NCLAT”) found the transaction to be facilitating a disbursement for consideration for the time value of money and having a commercial effect of borrowing.


Ever since IBC was enacted, it has been reforming the financial markets and contributing positively towards asset value maximization and resolution of stressed assets. The code lays down a unique scheme by providing for two distinct classes of creditors, namely financial creditors and operational creditors. The “financial creditors” have been bestowed with a greater responsibility in the process of insolvency resolution. Thus, in order to further the object of the code, a clear demarcation is essential as to who shall come within the scope of the meaning of “financial creditors”.

Against this backdrop, a conflicting situation arose when the Supreme Court avowed a blanket exclusion of third-party security interest holders from “financial creditors” as defined in the code. The stance was taken without accepting or rejecting the lower court decisions on the exceptional and unique position of the “put option” holders and thus, incidentally encroaches upon their rights as well. Despite the flaw, this remains the governing law and thus, needs to be revisited.

The authors are 4th Year students at NUALS, Kochi