M/s Sameer Sales Pvt. Ltd., hereinafter referred to as "the original lender", advanced a term loan of Rs 1.60 crores to the corporate debtor for a period of two years, to enable the corporate debtor to meet its working capital requirement. The appellant claims that the corporate debtor made some payments, but Rs 1.56 crores still remains outstanding.
ISSUE
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 insolvency resolution process under Section 7 IBC.
HELD
NCLT AND NCLAT
The petition was, however, rejected by a judgment and order dated 23-10-2020. The adjudicating authority (NCLT) inter alia held:
It is reiterated that in the present case neither the loan agreement has any provision regarding the payment of interest nor there is any supporting evidence/ document to establish applicable rate of interest to be paid on the said loan. The applicant has failed to prove that the loan was disbursed against consideration for time value of money, particularly when the respondent company has affirmed that no interest has been paid not payable at any point of time.
Being aggrieved, the appellant filed an appeal under Section 61 IBC. The appeal has been dismissed by NCLAT.
Being aggrieved, the appellant filed an appeal under Section 62 IBC
SUPREME COURT
The judgment and order of NCLAT, affirming the judgment and order of the adjudicating authority (NCLT) and dismissing the appeal is patently flawed. Both NCLAT and NCLT have misconstrued the definition of "financial debt" in Section 5(8) IBC, by reading the same in isolation and out of context.
Section 5(8) 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) /BC. The definition of "financial debt" in Section 5(8) includes the components of sub-clauses (a) to (i) of the said Section.
NCLT and NCLAT have overlooked the words "if any" which could not have been intended to be otiose. "Financial debt" means outstanding principal due in respect of a loan and would also include interest thereon, if any interest were payable thereon. If there is no interest payable on the loan, only the outstanding principal would qualify as a financial debt. Both NCLAT and NCLT have failed to notice clause (f) of Section 5(8), in terms whereof "financial debt" includes any amount raised under any other transaction, having the commercial effect of borrowing.
Furthermore, sub-clauses (a) to (i) of sub-section (8) of Section 5 IBC are apparently illustrative and not exhaustive. Legislature has the power to define a word in a statute. Such definition may either be restrictive or be extensive. Where the word is defined to include something, the definition is prima facie extensive.
HELD
It is reiterated that the trigger for initiation of the corporate insolvency resolution process by a financial creditor under Section 7 IBC is the occurrence of a default by the corporate debtor. "Default" means non-payment of debt in whole or part when the debt has become due and payable and debt means a liability or obligation in respect of a claim which is due from any person and includes financial debt and operational debt. The definition of "debt" is also expansive and the same includes, inter alia, financial debt. The definition of "financial debt" in Section 5(8) IBC does not expressly exclude an interest free loan. "Financial debt" would have to be construed to include interest free loans advanced to finance the business operations of a corporate body.