M/S ORATOR MARKETING PVT. LTD. VS M/S SAMTEX DESINZ PVT. LTD. : CASE SUMMARY
The Supreme Court in M/S Orator Marketing Pvt. Ltd. Vs. M/S Samtex Desinz Pvt. Ltd. (2023 ) 3 SCC 753 held that interest free loan will be covered under definition of financial debt under Section 5(8) of the Insolvency and Bankruptcy Code, 2016.
FACTS OF THE CASE
Sameer Sales Pvt. Ltd. advanced a term loan of Rs. 1.60 Crore to the Corporate Debtor for a period of two years to enable the Corporate Debtor to meet its working capital requirement. Sameer Sales assigned the outstanding loan to the appellant. Loan was to be repaid by the Corporate Debtor in full within 01.02.2020. The Corporate Debtor claimed that an amount of Rs. 1.56 Crore was outstanding.
The Appellant filed Petition under Section 7 IBC for initiation of Corporate Insolvency Resolution Process. The NCLT dismissed the application on the ground that claim is not covered under “financial debt” as loan was interest free.
An appeal was filed before NCLAT, which was also dismissed.
FINDINGS OF THE SUPREME COURT
The short issue before the Supreme Court in this matter was whether loan advanced to the Corporate Debtor, which was free of interest , will be covered under financial debt or not .
The Supreme Court observed that in construing and/or interpreting any statutory provision, one must look into the legislative intent of the statute. When a question arises as to the meaning of a certain provision in a stature, the provision has to be read in context.
The Supreme Court noted that in Pioneer Urban Land and Infrastructure Ltd Vs. Union of India (2019) 8 SCC 416 even individuals who were debenture holders and fixed deposit holders were held to be financial creditors.
Section 5 (8) defines “financial debt” to mean “a debt alongwith 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) of the IBC. The definition of “financial debt” in Section 5 (8) includes the components of sub-clauses (a) to (i) of the said Section.
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 loan and would also include interest thereon, if any interest was payable. If there is no interest payable on the loan, only outstanding principle would qualify as financial debt. Both NCLT and NCLAT failed to notice clause (f) of Section 5 (8), in terms whereof “financial debt” includes any amount raised under any transaction having commercial effect of borrowing.
The Court observed that sub-clauses (a) to (i) of sub-section 8 of Section 5 IBC are apparently illustrative and not exhaustive. Where the word is defined to include something, the definition is prima facie extensive.
The Supreme court observed that definition of “Financial Debt” in Section 5 (8) IBC does not expressly exclude an interest free loan. “Financial Debt” would have to construed to include interest free loans advanced to finance the business operations of a corporate body.
The Supreme Court set aside the judgment of NCLAT and allowed the appeal. Section 7 Petition was revived and directed to be decided afresh in accordance with law.
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Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.