In a recent judgment, the Supreme Court clarified that a "financial debt" would include an interest-free loan advanced to finance the business operations of a corporate body.(1)
The main question of law for consideration before the Supreme Court was:
whether a person who gives a term loan to a Corporate Person, free of interest, on account of its working capital requirements is not a Financial Creditor, and therefore, incompetent to initiate the Corporate Resolution Process under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC)?
M/s Sameer Sales Private Limited (original lender) advanced a term loan of Rs16 million to M/s Samtex Desinz Pvt Ltd (corporate debtor/respondent) for a period of two years to enable the latter to meet its working capital requirement.
Thereafter, the outstanding loan was assigned to M/s Orator Marketing Pvt Ltd (appellant). Since part of the loan remained unpaid, the appellant filed a petition under section 7 of the Insolvency and Bankruptcy Code (IBC) before the National Company Law Tribunal (NCLT) to initiate a corporate insolvency resolution process against the corporate debtor.
The petition was rejected on the ground that the appellant had failed to prove that the loan was provided against the consideration for time value of money. It was further held that the onus was on the appellant to prove that the debt claimed in the petition fell within the definition of "financial debt" as set out in section 5(8) of the IBC(2) and that the appellant fell within the meaning of "financial creditor".
Aggrieved by the NCLT's order, the appellant filed an appeal under section 61 of the IBC. The National Company Law Appellate Tribunal (NCLAT), while agreeing to the findings of the NCLT, dismissed the appeal of the appellant.
The matter was appealed before the Supreme Court. The Supreme Court, after considering several of its own judgments and the relevant provisions of the IBC, observed as follows:
- The NCLT and the NCLAT had overlooked the words "if any" (as provided under section 5(8) of the IBC), which the legislatures could not have been intended to be otiose. "Financial debt" means the outstanding principal due in respect of a loan and would also include interest thereon, if any were payable. If there is no interest payable on the loan, only the outstanding principal would qualify as a financial debt.
- Having regards to the aims, objects and scheme of the IBC, there is no discernible reason why a term loan to meet the financial requirements of a corporate debtor for its operation, which obviously has the commercial effect of borrowing, should be excluded from the purview of a financial debt.
- "Financial debt" as defined under section 5(8) of the IBC does not expressly exclude interest-free loans.
- "Financial debt" would have to be construed to include an interest-free loan advanced to finance the business operations of a corporate body.
In light of these findings, the Supreme Court set aside the findings of the NCLT and the NCLAT and revived the matter by remanding it to the NCLT to redecide on the application filed under section 7 of the IBC.
For further information on this topic please contact Shwetabh Sinha or Sidhant Pandita at Clasis Law by telephone (+91 11 4213 0000) or email ([email protected] or [email protected]). The Clasis Law website can be accessed at www.clasislaw.com.
(1) M/s Orator Marketing Pvt Ltd v M/s Samtex Desinz Pvt. Ltd (Civil Appeal 2331 of 2021, July 26, 2021).
(2) Section 5(8) defines "financial debt" as "a debt along with interest if any which is disbursed against the consideration of the time value of money and includes money borrowed against the payment of interest".