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2021 (8) TMI 314 - SC - Insolvency and BankruptcyInterpretation of statute - Financial creditor or not - Interest free loan - competent to initiate the Corporate Resolution Process under Section 7 of the IBC or not - person who gives a term loan to a Corporate Person, free of interest, on account of its working capital requirements - HELD THAT - 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. 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 - Under Section 6 of the IBC, a right accrues 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. Corporate Resolution Process gets triggered when a Corporate Debtor commits a default. A Financial Creditor may file an application for initiating a Corporate Insolvency Resolution Process against the Corporate Debtor, when a default has occurred - Default is defined in section 3(12) to mean non-payment of a debt when the whole or any part or instalment 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 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 a 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 - Furthermore, sub-clauses (a) to (i) of Sub-section 8 of Section 5 of the IBC are apparently illustrative and not exhaustive. Legislature has the power to define a word in a statute. Such definition may either be restrictive or be extensive. Where the word is defined to include something, the definition is prima facie extensive. 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. Appeal allowed.
Issues Involved:
1. Determination of whether an interest-free term loan qualifies as a "financial debt" under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC). 2. Eligibility of the appellant to initiate the Corporate Insolvency Resolution Process (CIRP) under Section 7 of the IBC. Issue-Wise Detailed Analysis: 1. Determination of whether an interest-free term loan qualifies as a "financial debt" under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC): The core issue in this appeal was whether a term loan given to a corporate person, free of interest, qualifies as a "financial debt" under Section 5(8) of the IBC. The appellant, an assignee of the debt, contended that the loan, although interest-free, was advanced to meet the working capital requirements of the corporate debtor and should be considered a financial debt. The NCLT and NCLAT had dismissed the appellant's petition on the grounds that the loan was interest-free and thus did not meet the definition of "financial debt" under Section 5(8) of the IBC. The NCLT noted, "Mere grant of loan and admission of taking loan will ipso facto not treat the applicant as ‘Financial Creditor’ within the meaning of Section 5(8) of the Code." The NCLAT affirmed this view, stating that the loan agreement did not provide for the payment of interest, and thus, the appellant failed to prove that the loan was disbursed against consideration for the time value of money. However, the Supreme Court found this interpretation flawed. It emphasized that the definition of "financial debt" in Section 5(8) of the IBC should not be read in isolation but in the context of the entire statute. The Court highlighted that the term "financial debt" includes any debt disbursed against the consideration for the time value of money, and the words "if any" in the definition indicate that interest is not a mandatory component. The Court stated, "If there is no interest payable on the loan, only the outstanding principal would qualify as a financial debt." The Supreme Court also referred to the inclusive nature of the definition under Section 5(8), which encompasses various forms of financial arrangements, including those having the commercial effect of borrowing. The Court concluded that an interest-free loan advanced to meet the working capital requirements of a corporate debtor has the commercial effect of borrowing and thus qualifies as a financial debt. 2. Eligibility of the appellant to initiate the Corporate Insolvency Resolution Process (CIRP) under Section 7 of the IBC: The second issue was whether the appellant, as an assignee of the debt, was eligible to initiate the CIRP under Section 7 of the IBC. The NCLT and NCLAT had held that since the loan was interest-free, the appellant did not qualify as a financial creditor and was thus ineligible to file the application under Section 7. The Supreme Court disagreed with this conclusion, stating that the eligibility to initiate CIRP should be adjudicated based on the definitions and provisions of the IBC. The Court noted that under Section 7, a financial creditor can file an application for initiating CIRP against a corporate debtor when a default has occurred. The term "financial creditor" includes any person to whom a financial debt is owed, and this debt can be legally assigned. The Court reiterated that the trigger for initiating CIRP is the occurrence of a default, defined as non-payment of a debt when it becomes due and payable. The definition of "debt" includes financial debt, which, as established, encompasses interest-free loans. Therefore, the appellant, as an assignee of the financial debt, was eligible to initiate CIRP under Section 7. Conclusion: The Supreme Court allowed the appeal, setting aside the judgments of the NCLT and NCLAT. It held that the interest-free loan advanced to meet the working capital requirements of the corporate debtor qualifies as a financial debt under Section 5(8) of the IBC. Consequently, the appellant, as an assignee of this debt, is a financial creditor eligible to initiate CIRP under Section 7 of the IBC. The petition under Section 7 was revived and remanded for fresh consideration in light of these findings.
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