In its decision on July 26, 2021 in the case of Messrs. Orator Marketing Private Limited v. Messrs. Samtex Desinz Private Limited, [Civil Appeal No. 2231 of 2021], the Supreme Court of India (“SC”) held that a lender who has advanced interest-free loans to a corporate body will be a financial creditor under the Insolvency and Bankruptcy Code, 2016 (“IBC”).
Sameer Sales Private Limited (“SSPL”) provided an interest free term loan of Rs. 1,60,00,000 (Rupees one crore sixty lacs only) to Samtex Desinz Private Limited (“Corporate Debtor”) for its working capital requirements, which was to be repaid in 2 (two) years. Thereafter, SSPL assigned the aforesaid loan to Orator Marketing Private Limited. (“Lender”). An amount of Rs. 1,56,00,000 (Rupees one crore fifty six lacs only) was due from the Corporate Debtor and thus, the Lender filed a petition under section 7 of the IBC for initiation of a corporate insolvency resolution process (“CIRP”) against the Corporate Debtor.
Proceedings in the National Company Law Tribunal (“NCLT”) and National Company Law Appellate Tribunal (“NCLAT”)
The NCLT held that for an application under section 7 under IBC, the onus lies on the applicant to establish that the loan was given against the ‘consideration for the time value of money’. Referring to the decision of Shreyans Relators Private Limited v. Saroj Realtors & Developers Private Limited [Company Appeal (AT) (Insolvency) No. 311 of 2018], where the NCLAT had held that the absence of the interest component suggests that the loan is not a financial debt, the NCLT held that, the loan did not qualify as a financial debt and thus, the Lender was not a financial creditor and could not file an application for initiation of CIRP.
Subsequently, the NCLAT upheld the NCLT’s decision and observed that if the money borrowed is not against payment of interest, it cannot be considered as a financial debt as there is no consideration for the time value of money.
Decision of the Supreme Court
The SC found that the NCLT and NCLAT had misconstrued the definition of ‘financial debt’ under the IBC. The term ‘financial debt’ is defined under section 5(8) of the IBC as:
“a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes […]” (emphasis supplied)
The SC observed that the NCLT and NCLAT had overlooked the phrase ‘if any’ in the definition of financial debt and that ‘financial debt’ means the principal outstanding in respect of the loan and would also include interest, if there is any interest payable. The SC also referred to clause (f) of section 5(8) of the IBC, in terms of which ‘financial debt’ includes any amount raised under any other transaction having the commercial effect of borrowing.
Further, the SC observed that the use of the term ‘includes’ in the definition of ‘financial debt’ suggests that the provisions of clauses (a) to (i) of section 5(8) of the IBC are only illustrative in nature and do not form an exhaustive list. In this regard, the SC referred to the case of Dilworth v. Commissioner of Stamps, [(1899) AC 99], where it was held that the term ‘include’ is used to broaden the scope of a definition.
Accordingly, it was held that the definition of ‘financial debt’ in section 5(8) of the IBC does not expressly exclude an interest free loan and that ‘financial debt’ would have to be construed to include interest free loans advanced to finance the business operations of a corporate body.
Please find a copy of the judgment here.
This update has been contributed by Aastha (Partner) and Tweesha Gosar (Associate).
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