116 B, Mittal Towers, Nariman Point, Mumbai, India

Introduction

The Insolvency and Bankruptcy Code, 2016 ('Code') holds a significant place in the current legal regime in India, with its main focus being on initiating a quicker winding up procedure for insolvent companies. As per its provisions, it also helps a company in efficiently winding up its activities within six months (or One Hundred and Eighty Days), and provides a three month (or ninety) - day period to assist in resolving the entire insolvency process which was previously incommodious.

In course of the same, the Supreme Court of India (‘SCI’) in the judgement of Orator Marketing v. Samtex Desinz Pvt. Ltd., has laid down that Section 7 of the Code shall also empower a lender in advancing an interest free loan for funding a corporate business to initiate the Corporate Insolvency Resolution Process (‘CIRP’) for the same, and would be classified as a ‘Financial Creditor’ (‘FC’) under the Code. Section 5(7) of the Code clearly defines an FC as being “Any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to”.

Facts of the Case

The Brief Facts of the case are as follows: M/S Sameer Sales Private Limited (‘Sameer Sales’) lent an amount of Rs. 1.60 crore to the corporate debtor for a duration of two years in order for the company to be able to meet all of its working capital requirements. At the time of repayment of the loan, very little of the entire loan was paid off and there was a pending outstanding of approximately Rs. 1.56 crore which was not still paid back by the corporate debtor, Sameer Sales filed a petition for CIRP at the National Company Law Tribunal (‘NCLT’) under Section 7 of the Code. Whilst the trial was pending in front of the National Company Law Appellate Tribunal (‘NCLAT’), it held that since the loan advanced by the lender was interest free in nature it would not warrant action under Section 7 of the Code as the same would not fall under the scope of Section 5(8) of the same, as it defines ‘Financial Debt’ as “a debt along with interest, if any, which is disbursed against the consideration for time value of money.” The NCLT and NCLAT had not taken into account the words “if any” as prescribed in the provisions. Previously, the NCLT rejected the petition by providing its reasoning that the lender’s loan was of an interest free nature, and accordingly if there is no payment of interest on the money borrowed, then it does not fulfil the prerequisite of the definition of ‘Financial Debt’ under the Code. The NCLT interpreted the optimal requirement of coming within the ambit of the definition of ‘Financial Debt’ as “consideration for the time value of money”.

The Appeal

Aggrieved by the Order of the NCLAT, an appeal under Section 62 of the Code was filed at the SCI. According to the appellants, Section 5(8) clearly defines ‘Financial Debt’ as “a debt along with interest, if any, which is disbursed against the consideration for time value of money”. The words “if any” play an important role as on a plain reading of the Section the simple understanding that stems from it is that the debt needs to pay, and interest if the debt warrants any or if the same has been agreed on by a mutual consent of the parties. Section 5(8)(f) specifically states that if the amount is raised under a different nature of transaction, which would also include a sale or purchase agreement, it would be said as to have the commercial effect of borrowing.

The SCI, citing the case of Innovative Industries v. ICICI Bank Ltd., stated that it was held that “The scheme of the Code is to ensure that when a default takes place, in the sense that a debt becomes due and is not paid, the insolvency resolution process begins. Default is defined in Section 3(12) in very wide terms as meaning non-payment of a debt once it becomes due and payable, which includes non-payment of even part thereof or an instalment amount.”

Justice Indira Banerjee also observed that “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 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.

Analysing the Verdict

It can be understood that this judgment is integral in providing clarity to what could have been a grey area, previously. This is because only those loans, that were provided attracting interest, were protected under the scheme of the Code if a case of insolvency arose. However, this judgement has expanded the scope of the same by successfully including interest-free loans under its ambit, in turn providing assurance to a major number of creditors and other relevant stakeholders.

Another relevant point that needs to be noted from the judgment is as follows: “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.”

It can be understood that the SCI has provided a very significant ruling, by reiterating how important interpretation is, and how critical it is to read a statute as a whole. Moreover, simply disregarding a few words from a the ambit of a Section can change its meaning as a whole. Further, reading definitions in isolation without complementing them with other relevant definitions in the Code would tarnish the honest nature of the meaning of the section(s) in the code. It is safe to say that this judgement shall set precedent in the future to aid in protecting lenders against malicious interpretations, and frivolous conduct.