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TMI Blog2021 (8) TMI 314X X X X Extracts X X X X X X X X Extracts X X X X ..... - 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant and confirmed the order dated 23.10.2020 of the Adjudicating Authority, i.e., the National Company Law Tribunal (NCLT), New Delhi, dismissing the petition being CP(IB) No. 908/ND/2020, filed by the Appellant under Section 7 of the IBC with the finding that the Appellant is not a financial creditor of the Respondent. The Appellant is an assignee of the debt in question. 2. The short question involved in this Appeal is, whether a person who gives a term loan to a Corporate Person, free of interest, on account of its working capital requirements is not a Financial Creditor, and therefore, incompetent to initiate the Corporate Resolution Process under Section 7 of the IBC. 3. M/s Sameer Sales Private Limited, hereinafter referred to as to Original Lender , advanced a term loan of ₹ 1.60 crores to the Corporate Debtor for a period of two years, to enable the Corporate Debtor to meet its working capital requirement. The Original Lender has assigned the outstanding loan to the Appellant. 4. According to the Appellant the loan was due to be repaid by the Corporate Debtor in full within 01.02.2020. The Appellant claims that the Corporate Debtor made some payments, bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted Anr. vs. Saroj Realtors Developers Private Limited Company Appeal (AT) (Insolvency) No.311 of 2018, vide its order dated 04.07.2018 Hon ble NCLAT has observed that when corporate debtor never accepted the component of interest and has given no undertaking to repay the loan with interest; the Appellants cannot claim to ow financial debt from the Corporate Debtor and thereby cannot be claimed to be a Financial Creditor as defined under Section 5(7) (8) of the Insolvency and Bankruptcy Code, 2016. 24. Therefore, neither the present claim can be termed to be a financial debt nor does the applicant come within the meaning of financial creditor . Once the applicant does not come within the meaning of financial creditor he becomes ineligible to file the application under Section 7 of the Insolvency Code 2016. 25. for the reasons stated above this petition fails and the same stands dismissed as not maintainable. 6. Being aggrieved, the Appellant filed an appeal under Section 61 of the IBC. The appeal has been dismissed by the NCLAT, by the judgment and order impugned before this Court. 7. The relevant part of the impugned judgment and order is extrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for any of the items referred to in sub-clauses (a) to (h) of this clause; Company Appeal (AT) (Ins) No.1064 of 20206 IBC separately defines debt under Section 3(11) as under:- (11) debt means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt; It is apparent that there can be debts which do not necessarily fall in the definition of financial debt or operational. Money borrowed against payment of interest comes within the definition financial debt. However, if the money borrowed is not against payment of interest, under the definition of financial debt, the core requirement is to find whether there is consideration for the time value of money . The facts of the matter disclose and the Appeal also records that when the Corporate Debtor was unable to get any further loan from the market after having taken loan from M/s. Tata Capital Financial Services Ltd., M/s. Sameer Sales which was related party to the Corporate Debtor, extended interest free unsecured loan to the Corporate Debtor payable on or after 1st February, 2020 and that too upon demand by the lenders. It would be appropriate to rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... signing of this agreement. 2.The aforesaid amount shall become due and payable 01-02-2020 or upon demand by the lender. 3.That having regard to the status of the parties, the present loan is being extended without any charge on any of the assets at present or in the future. 4.Commencing of the date of this Agreement, the Loan shall bear NIL interest. 5.Notwithstanding anything contained in this agreement, the loan amount shall become immediately due and payable at any time on or after the expiry of a period of two years i.e. on or after 01/02/2020 upon demand by the Lender. 6.The Borrower agrees that so long as the loan as in outstanding the Borrower will inform the Lender in any change in the constitution of the Borrower. 7.The Borrower shall repay the entire loan on or before 04/02/2020 and that till such a time the entire amount is not repaid the terms of the present agreement shall remain in force. The Borrower is entitled to pre-pay the loan amount at any time, without any penalty, after giving the lender notice in writing of its intention of the same. 8.The agreement shall remain in force of the term indicated in Clause 7 above unless termin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e general purpose of the Act itself, as observed by Mukherjea, J. in Poppatlal Shah Vs. State of Madras AIR 1953 SC 274, and a plethora of other judgments of this Court. To quote Krishna Iyer, J, the interpretative effort must be illumined by the goal, though guided by the words . 10. 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. 11. In Innoventive Industries Ltd. Vs. ICICI Bank Ltd. (2018) 1 SCC 407 , authored by Nariman, J., this Court analysed the scheme of the IBC and held: 27. The scheme of the Code is to ensure that when a default takes place, in the sense that a debt becomes due and is not paid, the insolvency resolution process begins. Default is defined in Section 3(12) in very wide terms as meaning non-payment of a debt once it becomes due and payable, which includes non-payment of even part thereof or an instalment amount. For the meaning of debt , we have to go to Section 3(11), which in turn te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he application. It is at the stage of Section 7(5), where the adjudicating authority is to be satisfied that a default has occurred, that the corporate debtor is entitled to point out that a default has not occurred in the sense that the debt , which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority. Under sub-section (7), the adjudicating authority shall then communicate the order passed to the financial creditor and corporate debtor within 7 days of admission or rejection of such application, as the case may be. 29. The scheme of Section 7 stands in contrast with the scheme under Section 8 where an operational creditor is, on the occurrence of a default, to first deliver a demand notice of the unpaid debt to the operational debtor in the manner provided in Section 8(1) of the Code. .......................................... The mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lopment of the Indian economy. What is interesting to note is that the Preamble does not, in any manner, refer to liquidation, which is only availed of as a last resort if there is either no resolution plan or the resolution plans submitted are not up to the mark. Even in liquidation, the liquidator can sell the business of the corporate debtor as a going concern. (See ArcelorMittal [ArcelorMittal (India) (P) Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1] at para 83, fn 3). 28. It can thus be seen that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The Code is thus a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors. The interests of the corporate debtor have, therefore, been bifurcated and separated from that of its promoters/those who are in management. Thus, the resolution process is not adversarial to the corporate debtor but, in fact, protective of its interests. The moratorium imposed by Section 14 is in the interest of the corporate debtor i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nitiating the corporate insolvency resolution process, the corporate debtor can prove that the debt is disputed. When the debt is so disputed, such application would be rejected. 14. In Pioneer Urban Land and Infrastructure Ltd. Vs. Union of India (2019) 8 SCC 416, this Court speaking through Nariman, J. referred to several earlier judgments including Innoventive Industries Ltd. (supra) and Swiss Ribbons Pvt. Ltd. (supra) and held that even individuals who were debenture holders and fixed deposit holders could also be financial creditors who could initiate the Corporate Resolution Process. 15. 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. 16. 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 Insol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. 24. In Dilworth v. Commissioner of Stamps (1899) AC 99 the Privy Council , dealing with a definition which incorporated the word include , 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (2020) 8 SCC 401, this court, speaking through Maheswari, J. referred to various precedents on restrictive and expansive interpretation of words and phrases used in a statute, particularly, the words means and includes and held:- 46. Applying the aforementioned fundamental principles to the definition occurring in Section 5(8) of the Code, we have not an iota of doubt that for a debt to become financial debt for the purpose of Part II of the Code, the basic elements are that it ought to be a disbursal against the consideration for time value of money. It may include any of the methods for raising money or incurring liability by the modes prescribed in clauses (a) to (f) of Section 5(8); it may also include any derivative transaction or counter-indemnity obligation as per clauses (g) and (h) of Section 5(8); and it may also be the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in clauses (a) to (h). The requirement of existence of a debt, which is disbursed against the consideration for the time value of money, in our view, remains an essential part even in respect of any of the transactions/dealings stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (10) and 3(11) of the Code, the scheme of things envisaged by the Code becomes clearer. The generic term creditor is defined to mean any person to whom the debt is owed and then, it has also been made clear that it includes a financial creditor , a secured creditor , an unsecured creditor , an operational creditor , and a decreeholder . Similarly, a debt means a liability or obligation in respect of a claim which is due from any person and this expression has also been given an extended meaning to include a financial debt and an operational debt . 49.1. The use of the expression means and includes in these clauses, on the very same principles of interpretation as indicated above, makes it clear that for a person to become a creditor, there has to be a debt, i.e., a liability or obligation in respect of a claim which may be due from any person. A secured creditor in terms of Section 3(30) means a creditor in whose favour a security interest is created; and security interest , in terms of Section 3(31), means a right, title or interest or claim of property created in favour of or provided for a secured creditor by a transaction which secures payment for the purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm 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. 30. In Prabhudas Damodar Kotecha Vs. Manhabala Jeram Damodar (2013) 15 SCC 358, this Court interpreting Section 41(1) of the Presidency Small Cause Courts Act, 1882, as amended by the Maharashtra Act XIX of 1976, observed that the golden rule is that the words of a statute must prima facie be given their ordinary meaning when the language or phraseology employed by the legislature is precise and plain'. Since Section 41(1) does not specifically exclude a gratuitous licensee or ..... 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