Lender Who Advanced Interest Free Loans To Corporate Body Is Also A Financial Creditor; Can Initiate CIRP: Supreme Court

The Supreme Court observed that a lender who advanced interest free loans to finance the business operations of a corporate body is a Financial Creditor and competent to initiate the Corporate Resolution Process under Section 7 of the Insolvency and Bankruptcy Code, 2016."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", the bench comprising Justices Indira Banerjee and V. Ramasubramanian observed.The court also held that Financial Debt' would include interest free loans advanced to finance the business operations of a corporate body, The question considered by the bench in the appeal against National Company Law Appellate Tribunal 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 IBC.Sameer Sales Private Limited, "Original Lender", advanced a term loan of Rs.1.60 crores to the Corporate Debtor for a period of two years to meet its working capital requirement. He filed a Petition under Section 7 of the IBC in the NCLT for initiation of the Corporate Resolution Process. The petition was rejected by National Company Law Tribunal. The NCLAT upheld this order observing that the lender had extended interest free unsecured loan and therefore would not come under the definition of Financial Creditor. According to NCLAT, if the money borrowed is not against payment of interest, under the definition of financial debt, the core requirement is to find whether there is "consideration for the time value of money".To hold that this interpretation is wrong, the bench referred to 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. "22. The 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.", the bench said.The bench further observed that sub-clauses (a) to (i) of Sub-section 8 of Section 5 of the IBC are illustrative and not exhaustive. "The definition of 'financial debt' in Section 5(8) of the IBC cannot be read in isolation, without considering some other relevant definitions, particularly, the definition of 'claim' in Section 3(6), 'corporate debtor' in Section 3(8), 'creditor' in Section 3(10), 'debt' in section 3(11), 'default' in Section 3(12), 'financial creditor' in Section 5(7) as also the provisions, inter alia, of Sections 6 and 7 of the IBC.", the court added.31. At the cost of repetition, it is reiterated that the trigger for initiation of the Corporate Insolvency Resolution Process by a Financial Creditor under Section 7 of the 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) of IBC does not expressly exclude an free loan. 'Financial Debt' would have to be construed to include interest free loans advanced to finance the business operations of a corporate body.", the bench said while allowing the appeal.The judgment also refers to various principles of interpretation of statutes.Interpretative effort "must be illumined by the goal, though guided by the wordsIn construing and/or interpreting any statutory provision, one must look into the legislative intent of the statute. The intention of the statute has to be found in the words used by the legislature itself. In case of doubt, it is always safe to look into the object and purpose of the statute or the reason and spirit behind it. Each word, phrase or sentence has to be construed in the light of the general purpose of the Act itself, as observed by Mukherjea, J. in Poppatlal Shah Vs. State of Madras, and a plethora of other judgments of this Court. To quote Krishna Iyer, J, the interpretative effort "must be illumined by the goal, though guided by the words"Statute has to be read as a wholeWhen a question arises as to the meaning...

Lender Who Advanced Interest Free Loans To Corporate Body Is Also A Financial Creditor; Can Initiate CIRP: Supreme Court

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