Financial debt is defined by Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC) as debt with a time value connected to it, meaning there must be some interest derived from the amount stated as debt. In the most recent instance, M/s Orator Marketing Pvt. Ltd v. M/s Samtex Designz Pvt. Ltd., the Hon'ble Supreme Court took a position that ran counter to this long-standing rule. The purpose of this article is to analyse the case's arguments and issues, as well as the logic underlying that reading of Section 5. (8). Samtex Desinz Pvt. Ltd. received a secured loan of 14 crores from M/s Tata Capital Financial Services (Tata Capital) (Samtex). Later, M/s Sameer Sales Pvt. Ltd. (Sameer Sales), a sibling company of Samtex, loaned Samtex an interest-free loan of 1.60 crores for two years because the initial loan wasn't enough to cover Samtex's capital needs. Later, M/s Orator Marketing Pvt. Ltd. received the debt assignment from Sameer Sales (Orator).
In the instant case titled M/s Orator Marketing Pvt. Ltd. v. M/s Samtex Designz Pvt. Ltd., the issue raised for clarification before the Supreme Court was:
Whether the amount of the interest-free loan qualifies as a debt under Section 5(8) of the IBC?
With regard to this issue, according to the Honourable Supreme Court, NCLT and NCLAT clearly erred in their decision. The definition and interpretation of debt should not be done in a vacuum or without taking the surrounding circumstances into account. Any provision of any statute must be interpreted in light of the legislative intent. It should be taken into account that any legislation was intended to address the wrong that was being done. The Adjudicating Authority must consider the information utility records or any other proof of default in cases where Section 7 applications under the IBC are made. The IBC is also a helpful piece of legislation, and it aims to revive the debtor as well as recover debt for creditors. Without taking into account the other definitions that are pertinent, such as "claim" under Section 3(6), "corporate debtor" under Section 3(8), "creditor" under Section 3(10), "debt" under Section 3(11), "default" under Section 3(12), and "financial creditor" under Section 5(7) along with Section 7 of the IBC, the term "financial debt" cannot be understood in isolation. If there is a default, a financial creditor may submit an application. If there is any doubt as to the applicant's eligibility for submission of a Section 7 application, the terminology employed in the relevant laws must be followed. The words "if any '' in the definition of financial debt under Section 5 were not taken into account by the NCLT and NCLAT (8). Financial debt is defined as a debt coupled with any applicable interest that is dispersed against the time value of money in the initial language of Section 5(8) of the IBC. If there is no interest, the principal amount would count as financial debt, as indicated by the phrase "if any." Additionally, Section 5(8) of the IBC's paragraph (f) talks about the commercial effects of borrowing, which are apparent in the current situation. Additionally, the phrases in Section 5(8)(a) of the IBC are illustrative rather than complete, and they are inclusive in nature.
To determine how to define the word "include," the Supreme Court referred to the matter of Dilworth v. Commissioner of Stamps (Privy Council). In this instance, it was claimed that the term "include" was introduced to the interpretation clause in order to broaden and understand the meaning. The Supreme Court did add, however, that expanding the meaning of the word "include" should not contradict the intent of the Act. For further discussion of avoidance transactions, the court cited the case of Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. v. Axis Bank Ltd. In this instance, it was said that the fundamental standards for payout against the time value of money cannot be ignored since, if they were, any transaction may fall within their purview. The court concluded by stating that, according to IBC, the Financial Creditor has been working with the Corporate Debtor since its beginning by giving the essential financial support in order to resuscitate a financially troubled organisation. Therefore, there is no justification for excluding a loan that was made to the Corporate Debtor in order to provide working capital from the definition of Financial Debt.
The Court categorically stated that,
" A ‘corporate debtor’ means a corporate person who owes a debt to any person, as per the definition of this expression in Section 3(8) of the IBC. Section 3(11) defines ‘debt’ to mean “a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.” The word ‘claim’ has been defined in Section 3(6) to mean inter alia “a right to payment, whether or not such right is reduced to judgement, fixed, disputed, undisputed, legal, equitable, secured or unsecured.” ‘Default’ is defined in section 3(12) to mean “non-payment of a debt when the whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the Corporate Debtor, as the case may be.” Under Section 5(7) of the IBC ‘financial creditor’ means any person to whom a financial debt is owed and includes a person to whom such debt has legally been assigned”.
The phrase "if any" served as the foundation for the choice. Financial debt is defined as debt with a potential for interest in Section 5(8) of the IBC. Since there was no interest paid on the loan in the current instance, the time value of money could not have existed, and the NCLT and NCLAT, therefore, dismissed the Section 7 application. However, the Supreme Court ruled that the words "if any" in Section 5(8) cannot be disregarded and that the term financial debt should be construed in context. The idea that interest-free loans would be considered financial debt for the purposes of filing a Section 7 application under the IBC has thus finally been established as precedent.