Loan to Corporate Person Free of Interest to be classified Financial Debt: Supreme Court [Read Judgment]

The Supreme Court ruled that the loan to Corporate Person free of interest to be classified Financial Debt.

The issue raised in the 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.

M/s Sameer Sales Private Limited, hereinafter referred to as to “Original Lender”, advanced a term loan of Rs.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, M/s Orator Marketing Pvt. Ltd.

According to the Appellant the loan was due to be repaid by the Corporate Debtor in full within February 1, 2020. The Appellant claims that the Corporate Debtor made some payments, but Rs.1.56 crores still remain 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 by a judgment and order dated October 23, 2020. 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.

The division bench of Justice Indira Banerjee and Justice V.Ramasubramanian while quashing the impugned order reiterated that 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.

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