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Where Credit is Due

An interesting appeal was filed in the apex court concerning the issue of people who give term loans to a corporation or corporate entity free of interest. The plea raised the issue whether such lenders were competent enough to initiate the corporate resolution process.

Division Bench of the Supreme Court, comprising Justices Indira Banerjee and V Ramasubramanian, held recently that a lender who gave interest-free loans to finance the business operations of a corporate body was a financial creditor and competent enough to initiate the corporate resolution process under Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016.

The verdict goes against the order of the National Company Law Appellate Tribunal (NCLAT), New Delhi, whereby it had dismissed the appeal of the appellant and confirmed the order, dated October 23, 2020, of the National Company Law Tribunal (NCLT), New Delhi, dismissing the petition being filed by the appellant under Section 7 of the IBC.

The appeal was whether a person, who gave a term loan to a corporate person, free of interest, on account of its working capital requirements, was not a financial creditor, and therefore, incompetent to initiate the corporate resolution process under Section 7 of the IBC.

MS Orator Marketing Pvt Ltd, the appellant, said that the loan was due to be repaid by the corporate debtor in full within February 01, 2020. The appellant stated that the corporate debtor made some payments, but Rs.1.56 crore still remained outstanding. The appellant filed a petition under Section 7 of the IBC in the NCLT for initiation of the corporate resolution process. The petition was, however, rejected. The appellant then filed an appeal under Section 61 of the IBC. The appeal was dismissed by the NCLAT, by the order impugned before the Court.

The apex court bench said that the order of the NCLAT, affirming the judgment and order of the adjudicating authority (NCLT) and dismissing the appeal was patently flawed. It observed that both the NCLAT and NCLT had misconstrued the definition of “financial debt” in Section 5(8) of the IBC, by reading the same in isolation and out of context.

The bench held that, in construing and/or interpreting any statutory provision, one must look into the legislative intent of the statute. The intention of the statute had to be found in the words used by the legislature itself. In case of doubt, it was always safe to look into the object and purpose of the statute or the reason and spirit behind it.

The bench noted that when a question arose as to the meaning of a certain provision in a statute, the provision had to be read in its context. The statute had 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 were also relevant factors. The bench opined that under Section 6 of the IBC, a right accrued to a financial creditor, an operational creditor and the corporate debtor itself to initiate the corporate insolvency resolution process in respect of such corporate debtor, in the manner provided in Chapter II of the IBC.

Section 7 of the IBC enables a financial creditor to file an application for initiating corporate insolvency resolution process against a corporate debtor either by itself, or jointly with other financial creditors or any other person on behalf of the financial creditor, as may be notified by the central government, when a default has occurred.

The Court ruled that a “corporate debtor” meant a corporate person who owed a debt to any person, as per the definition of the 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.”

“Default” is defined in Section 3(12) to mean “non-payment of a debt when the whole or any part or installment 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 Court stated that the NCLT and NCLAT had overlooked the words “if any” which could not have been intended to be otiose. “Financial debt” meant 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.

The Court relied on the case of Dilworth vs Commissioner of Stamps the Privy Council, dealing with a definition which incorporated the word “include”, and said, “The word ‘include’ is very generally used in interpretation clauses in order to enlarge the meaning; and when it is so used these words or phrases must be construed as comprehending, not only such things as they signify according to their natural import, but also those as things which the interpretation clause declares that they shall include. But the word ‘include’ is susceptible to another construction, which may become imperative, if the context of the Act is sufficient to show that it was not merely employed for the purpose of adding to the natural significance of the words or expressions defined. It may be equivalent to ‘mean and include’, and in that case it may afford an exhaustive explanation of the meaning which, for the purposes of the Act, must invariably be attached to these words or expressions.”

The Court citing the judgment in Jaypee Infratech Ltd. (supra), said that the debts in question were in the form of third-party security, given by the corporate debtor to secure loans and advances obtained a third party from the respondent lender and, therefore, held not to be a financial debt within the meaning of Section 5(8) of the IBC. There was no occasion for this Court to consider the status of a term loan advanced to meet the working capital requirements of the corporate debtor, which did not carry interest. Having regard to the aims, objects and scheme of the IBC, 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.

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The Court while allowing the appeal said that “default” meant non-payment of debt in whole or part when the debt had become due and payable and debt meant a liability or obligation in respect of a claim which was due from any person and included financial debt and operational debt. The definition

of “debt” was also expansive and the same included inter alia financial debt. The definition of “financial debt” in Section 5(8) of IBC did 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.

—By Adarsh Kumar and India Legal News Service

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