IBC UPDATE | INTEREST FREE LOANS TO COME UNDER THE AMBIT OF ‘FINANCIAL DEBT’
The Supreme Court of India in the case of Orator Marketing Private Limited Vs Samtex Desinz Private Limited passed a material judgment which interpreted the definition of `financial debt` defined under section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC).
Question of law for adjudication:Whether a person who gives an interest free term loan to a Corporate Person 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 IBC?
Background of the case: Sameer Sales Private Limited (Original Lender) advanced a term loan of INR 16 million (Loan) to Samtex Desinz Private Limited (Corporate Debtor) for meeting its working capital requirement vide a Loan Agreement dated 20 January 2018 (Loan Agreement). The Original Lender assigned the loan to Orator Marketing Private Limited (Appellant). The loan was to be repaid by the Corporate Debtor in full by 1 February 2020. The Appellant claimed that the Corporate Debtor made some payments, but around INR 15 million was still outstanding.
NCLT Order : The Appellant filed a petition under section 7 of IBC in the National Company Law Tribunal, New Delhi Bench Court- VI (NCLT). The Adjudicating Authority held that ``Mere grant of loan and admission of taking loan will ipso fact not treat the applicant as `Financial Creditor` within the meaning of Section 5(8) of the Code``. It was observed that neither the Loan Agreement has any provision regarding the payment of interest nor is there any supporting document to establish the applicable rate of interest to be paid on the said loan. The two requirements i.e., debt along with interest and disbursement made against the `consideration for the time value of money` were not satisfied by the Appellant. Thus, the NCLT dismissed the Petition on 23 October 2020.
NCLAT Order : Being aggrieved by the NCLT Order, the Appellant preferred an Appeal before the National Company Law Appellate Tribunal (NCLAT) wherein the NCLAT affirmed the NCLT order and dismissed the Appeal. :
Supreme Court Judgment: The Appellant preferred an Appeal before the Supreme Court. The Division Bench of the Supreme Court observed that NCLAT and NCLT have misconstrued the definition of `financial debt` in Section 5(8) of the IBC, by reading the same in isolation and out of context. The Supreme Court explained that any statutory provision must be construed and / or interpreted in light of the statute`s legislative intent. The statute`s intent must be understood by the words used by the legislature. If there`s any uncertainty, it`s safe to check into the statute`s intent and purpose or the motivation and spirit that led to it. It noted that the legislature has defined the provision of financial debt with the word `include` which makes the definition broad. The sub-clauses (a) to (i) of section 5(8) are illustrative in nature and not exhaustive. The Supreme Court held that section 5(8) of IBC defines `financial debt` to mean `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, as per Section 5(8) (a) of the IBC`. The Corporate Insolvency Resolution Process (CIRP) gets triggered when the Corporate Debtor commits a default. The NCLAT and NCLT have failed to consider and overlooked the words `if any` in the definition.
If the financial Loan does not include interest, only the outstanding principal would qualify as a financial debt. The Supreme Court set aside the orders of NCLT and NCLAT (Impugned Orders) and revived the section 7 application.
The Supreme Court has rightly set aside the Impugned Orders and classified the interest free loans under the purview of Financial Debt. This judgment sets a precedent and provides remedies to the Financial Creditors who have given interest free loans and could not proceed with IBC due to the sole reason of interest clause.
This update was released on 27 Sep 2021.
Legal Update Team
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