INTERPRETATION OF THE TERM ‘DEBT’ UNDER INSOLVENCY AND BANKRUPTCY CODE, 2016

[Mr. M. GOVINDARAJAN]

Introduction

The corporate insolvency resolution process can be initiated by a financial creditor or an operational creditor or by the corporate applicant.  In respect of financial creditor filing an application against the corporate debtor is to prove that there is a debt and default of debt i.e., financial debt.  Like that in respect of operational creditor filing an application against the corporate debtor is to prove that there is a debt and default of debt with support of documentary evidences and there shall not be no dispute on the debt.  The Code defines the term ‘debt’, ‘financial debt’ and ‘operational debt’.   In some cases dispute arises before the Adjudicating Authority whether the debt claimed amounts to either ‘financial debt’ or ‘operational debt’.  As such interpretation of the word ‘debt’ arises.   In this article some of the case laws are discussed as to the interpretation of the term ‘debt’.

Debt

Section 3(11) of the Insolvency and Bankruptcy Code, 2016 defines the term ‘debt’ as  a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.

Financial debt

Section 5(8) of the Code defines the expression ‘financial debt’ as a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes-

(a) money borrowed against the payment of interest;

(b) any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent;

(c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;

(d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian (e) Accounting Standards or such other accounting standards as may be prescribed;

(f) receivables sold or discounted other than any receivables sold on non-recourse basis;

(g) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;

(h) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;

(i) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;

(j) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause.

For the purpose of clause (f) an explanation has been inserted by the amendment Act with effect from 06.06.2018.  According to the explanation-

• any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and
• the expressions, "allottee" and "real estate project" shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016)

Operational debt

Section 5(21) defines the expression ‘operational debt’ as a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.

Financial debt – case laws

Subscription money

In ‘ACPC Enterprises v. Affinity Beauty Salon (P) Limited’ – 2017 (12) TMI 290 - NATIONAL COMPANY LAW TRIBUNAL, NEW DELHI the Adjudicating Authority held that the subscription money advanced for purchase of shares would not fall within the definition of ‘financial debt’ and therefore the petitioner cannot be regarded as a financial creditor.  The subscription amount has not been disbursed against consideration for time value of money nor this is money borrowed against the payment of interest.

Assured returns

In ‘Pawan Dubey v. JBIC Developers (P) Limited’ – 2018 (3) TMI 1266 - NATIONAL COMPANY LAW TRIBUNAL, NEW DELHI the Adjudicating Authority held that there is no claim that the yearly assured returns were not paid the respondent company, in other words, there was no default payment of assured return and hence the application was not maintainable as the present claim could not be termed as ‘financial debt’ and the applicant did not come with the purview of financial creditors.

In ‘Nikhil Mehta & Sons Limited (HUF) v. AMR Infrastructure Limited’ – 2017 (3) TMI 151 - NATIONAL COMPANY LAW TRIBUNAL, NEW DELHI the Adjudicating Authority held that where the nature of transaction is pure and simple agreement of sale of office space, merely because some ‘assured amount’ of return has been promised and it stands breached, such a transaction would not acquire the status of a ‘financial debt’ as the transaction does not have consideration for the time value of money, which is a substantive ingredient to be satisfied for fulfilling the requirements of the expressional ‘financial debt’.

In ‘Manoj Kumar Bahri and another v. Entertainment City Limited’ – 2018 (5) TMI 1331 - NATIONAL COMPANY LAW TRIBUNAL, NEW DELHI the Adjudicating Authority held that where the applicants booked commercial space and were promised assured returns till date of possession after licence and handing over of possession to the applicants they cannot claim towards payment of assured return, since such claim could not be termed as ‘financial debt’ nor the applicants would come within the meaning of financial creditors.

Payment of interest

In ‘Sanjay Kewalrameni v. Sunil Paramanand Kewalrameni and others’ –  2019 (1) TMI 1313 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI   the Appellate Tribunal held that mere fact that the company  paid interest @ 12% per annum during certain period, the debt cannot come within the meaning of ‘financial debt’ to treat the respondent as financial creditors.

Operational debt – case laws

Invested money

In ‘Sanjeev Jain v. Eternity Infracon (P) Limited’ – 2017 (8) TMI 509 - NATIONAL COMPANY LAW TRIBUNAL, NEW DELHI the applicant has invested money and admittedly has neither supplied any goods nor has rendered any services etc., as defined in section 5(21) of the Code and as his claim does not fall within the purview of the ‘operational debt’ he cannot acquire the status of the operational creditor.

Non refund of service tax

In ‘Cyient Limited v. Techware Infotech (P) Limited’ – 2019 (1) TMI 1314 - NATIONAL COMPANY LAW TRIBUNAL, HYDERABAD the Adjudicating Authority held that the undertaking given by corporate debtor pursuant to the undertaking memorandum for refund or service tax does not fall within the definition of ‘operational debt’ in terms of section 5(21) of the Code and the failure to refund service tax not being operational debt, it cannot maintain petitioner under Section 9 of the Code.

The case laws cited in this article is not an exhaustive one.  Till many cases may arrive as to the interpretation of the words ‘debt’, ‘financial debt’ or ‘operational debt’.