Lender Who Advanced Interest-Free Loans to Corporate Body is also A Financial Creditor; can Initiate CIRP: Supreme Court

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Financial Creditor: A Lender Who Advanced Interest-Free Loans to Corporate Body- interpreted by the Supreme Court

Case: Orator Marketing Pvt. Ltd. vs. Samtex Desinz Pvt. Ltd.

Coram: Justices Indira Banerjee and V. Ramasubramanian

Case No: CIVIL APPEAL NO. 2231 OF 2021

Court Observation: “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 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 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 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.”

“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 a free loan. ‘Financial Debt’ would have to be construed to include interest-free loans advanced to finance the business operations of a corporate body.”

“In 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. The 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” When a question arises as to the meaning of a certain provision in a statute, the provision has to be read in its context. The statute has to be read as a whole. The previous state of the law, the general scope and ambit of the statute, and the mischief that it was intended to remedy are relevant factors.

Where the word is defined to include something, the definition is prima facie extensive. Of course, depending on the context in which the word ‘includes’ may have been used, and the objects and the scheme of the enactment as a whole, the expression ‘includes’ may have to be construed as restrictive and exhaustive.

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