Financial debt - Definition / Legal Terminology and Intorduction - Insolvency and Bankruptcy

As per section 5(8) of the Insolvency and Bankruptcy Code, 2016. Financial debt means 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 Accounting Standards or such other accounting standards as may be prescribed; (e) receivables sold or discounted other than any receivables sold on non-recourse basis; (f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing; Explanation. -For the purposes of this sub-clause,- (i) 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 (ii) 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; (g) 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; (h) 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; (i) 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; SHIVAM AGRIOILS PVT. LTD. VERSUS SHREE KRISHNA VANASPATI INDUSTRIES PVT. LTD.- [ 2023 (5) TMI 934 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL] The Hon ble Supreme Court is in Pioneer Urban Land and Infrastructure Ltd. v. Union of India (2019) 8 SCC 416, ( Pioneer Urban in short) where the concept of financial debt has been elaborately discussed in the light of several earlier judgments including Innoventive Industries Ltd. v. ICICI Bank (2018) 1 SCC 407 and Swiss Ribbons (P) Ltd. v. Union of India (2019) 4 SCC 17. The relevant excerpts are as extracted under: 70. The definition of financial debt in Section 5(8) then goes on to state that a debt must be disbursed against the consideration for time value of money. Disbursement is defined in Black's Law Dictionary (10th Edn.) to mean: 1. The act of paying out money, commonly from a fund or in settlement of a debt or account payable. 2. The money so paid; an amount of money given for a particular purpose. 71. In the present context, it is clear that the expression disburse would refer to the payment of instalments by the allottee to the real estate developer for the particular purpose of funding the real estate project in which the allottee is to be allotted a flat/apartment. The expression disbursed refers to money which has been paid against consideration for the time value of money . In short, the disbursal must be money and must be against consideration for the time value of money , meaning thereby, the fact that such money is now no longer with the lender, but is with the borrower, who then utilises the money. Thus far, it is clear that an allottee disburses money in the form of advance payments made towards construction of the real estate project. We were shown the Dictionary of Banking Terms (2nd Edn.) by Thomas P. Fitch in which time value for money was defined thus: present value : today's value of a payment or a stream of payment amount due and payable at some specified future date, discounted by a compound interest rate of DISCOUNT RATE. Also called the time value of money. Today's value of a stream of cash flows is worth less than the sum of the cash flows to be received or saved over time. Present value accounting is widely used in DISCOUNTED CASH FLOW analysis. That this is against consideration for the time value of money is also clear as the money that is disbursed is no longer with the allottee, but, as has just been stated, is with the real estate developer who is legally obliged to give money's equivalent back to the allottee, having used it in the construction of the project, and being at a discounted value so far as the allottee is concerned (in the sense of the allottee having to pay less by way of instalments than he would if he were to pay for the ultimate price of the flat/apartment). 75. And now to the precise language of Section 5(8)(f). First and foremost, the sub-clause does appear to be a residuary provision which is catch all in nature. This is clear from the words any amount and any other transaction which means that amounts that are raised under transactions not covered by any of the other clauses, would amount to a financial debt if they had the commercial effect of a borrowing. 77. A perusal of these definitions would show that even though the petitioners may be right in stating that a borrowing is a loan of money for temporary use, they are not necessarily right in stating that the transaction must culminate in money being given back to the lender. The expression borrow is wide enough to include an advance given by the homebuyers to a real estate developer for temporary use i.e. for use in the construction project so long as it is intended by the agreement to give something equivalent to money back to the homebuyers. The something equivalent in these matters is obviously the flat/apartment. Also of importance is the expression commercial effect . Commercial would generally involve transactions having profit as their main aim. Piecing the threads together, therefore, so long as an amount is raised under a real estate agreement, which is done with profit as the main aim, such amount would be subsumed within Section 5(8)(f) as the sale agreement between developer and home buyer would have the commercial effect of a borrowing, in that, money is paid in advance for temporary use so that a flat/apartment is given back to the lender. Both parties have commercial interests in the same the real estate developer seeking to make a profit on the sale of the apartment, and the flat/apartment purchaser profiting by the sale of the apartment. Thus construed, there can be no difficulty in stating that the amounts raised from allottees under real estate projects would, in fact, be subsumed within Section 5(8)(f) even without adverting to the Explanation introduced by the Amendment Act. 25. Expanding further on the ambit and scope of financial debt in terms of Section 5(8) of IBC , we notice that the Hon ble Supreme Court in Orator Marketing (P) Ltd. v. Samtex Desinz (P) Ltd., (2023) 3 SCC 753 ( Orator in short) has observed: 21. The definition of financial debt in Section 5(8) IBC has been quoted above. Section 5(8) defines financial debt to mean a debt along with 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) IBC. The definition of financial debt in Section 5(8) includes the components of sub-clauses (a) to (i) of the said Section. 22. 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. 23. Furthermore, sub-clauses (a) to (i) of sub-section (8) of Section 5 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. 31. 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 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) 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.