Significance of Time value of money in financial debt under IBC

Introduction-

The term financial debt has been defined under Section 5(8) of the Insolvency and Bankruptcy Code 2016 (IBC). However, given the nascent stage that the statute is in now, there has been a lot of back and forth regarding the interpretation of this term and what kind of debt qualifies as ‘financial debt’. In the most recent landmark judgement by theSupreme Court of India, in the case of Orator Marketing. (Pvt.) Ltd. v. SamtexDesinz (Pvt.)Ltd., the court has interpreted it in a new, different way, which has attracted a lot of criticism and which we will be discussing in this article.

Background-

The appellant in the present case is the original lender who gave a loan worth INR 1.6 crores to its sister concern, the respondent firm, in order to meet the latter’s capital requirements since the respondent firm failed to secure a loan from the market as it already owed a loan to M/STata Capital Financial Services Pvt. Ltd. The loan sum was to be repaid in February 2020, and that too without any interest rate whatsoever. When the respondent failed to pay back the loan in its entirety, the appellant filed an application before the National Company Law Tribunal (NCLT) under Section 7 of IBC to initiate the Corporate Insolvency Resolution Process (CIRP). NCLT, however, recorded that the applicant (i.e., appellant in the present case) had failed to prove that they qualify as a financial creditor’ which is defined in Section 5(7) of the IBC[2] or that interest was payable with the loan under the agreement signed. The appellant approached the National Company LawAppellate Tribunal (NCLAT). However, the appeal was dismissed as adjudicating authority observed that the loan forwarded by the appellant cannot be considered as ‘financial debt.’ and as such, the latter has no right to initiate CIRP. The appellant approached the Supreme Court against the impugned judgement of the NCLAT.

Judgment of the apex court-

The court dismissed the judgments from NCLT and NCLAT right away, stating that they’ve misconstrued the meaning of the term financial debt as defined under Section 5(8), and misinterpreted the Clauses (a) to (i) given therein. It pointed out that interest isn’t a pre-requisite while adjudging whether the said loan qualifies as financial debt or not, as the phrase ‘if any’ in section 5(8) makes it clear. Also, the apex court pointed out that the section is supposed to provide an illustrative (and not exhaustive) definition, and it should be considered as ‘extensive’ rather than restrictive. The term ‘includes’ in Section 5(8), read in this context, proves that debts that don’t fall under the given subclauses (a) to (i) can also be considered financial debt, depending upon the context of the case, due to the section’s extensive (and not restrictive) nature. Further, the court adjudged that given the aims and objectives of the IBC, a loan forwarded for the purpose of meeting the financial requirements of the debtor have a commercial effect of borrowing and qualifies as financial debt. Thus, the loan forwarded by the appellant to the respondent was adjudged by the apex court to be ‘financial debt’, his appeal was allowed, and the judgment given by NCLAT was set aside.

Analysis-

It has to be noted that the court didn’t explicitly deal with the issue of whether the debt that the appellant extended was a sum of money that was disbursed against some consideration for the ‘time value of money or not. While this phrase isn’t defined within the statute, a simple reading of the relevant section makes it clear that it is a pre-requisite when it comes to determining whether a debt qualifies as financial debt or not. The court only selectively pointed out the phrase ‘if any’ in section 5(8) to make it clear that interest isn’t necessary, although this interpretation has been proclaimed previously by NCLAT in the case of Shailesh Sangani v. Joel Cardoso. The court, however, did make a statement that a loan extended for the purpose of meeting the financial requirements of the debtor does qualify as a transaction having the commercial effect of borrowing in para 29 of the judgment, although without giving a proper explanation as to why.

Since transactions of loans that have the commercial effect of borrowing qualify as financial debt under Section 5(8)(f)the court might’ve decided to ignore analysing whether the money amount disbursed by the appellant in the present case was a debt disbursed against the consideration for the time value of money. If this is indeed the rationale, then it completely contradicts the judgment of the Supreme Court in the case of Jaypee Infratech Ltd. V. Axis Bank Ltd., wherein the bench consisting of A.M.Khanwilkar and Dinesh Maheshwari, JJ, wherein the learned judges proclaimed that the types of debt defined in clauses (a) to (i) of Section 5(8) have to conform to the parent necessarily.

The definition is given within the said section, which in turn defines consideration for the time value of money as essential for the purpose of determining whether a debt qualifies as financial debt or not. In other words, even if a debt conforms to any of the Clauses (a) to (i), it still wouldn’t qualify as financial debt unless it is disbursed against some consideration for its time value. The judgment in the Jaypee case was, however, itself contradictory to a previous ruling by this court in the case of Pioneer Urban Land and Infrastructure Ltd. & Anr. V Union of India & Ors., wherein the three-judge bench adjudicated that the debts which fall under any of the Clauses (a) to (i) do not need to hold to the principal definition under Section 5(8).

Conclusion-

The dilemma over what qualifies as ‘financial debt’ under Section 5(8) of IBC, as well as over the issue of whether consideration for the time value of money is an essential part of the definition of financial debt, remains. The section itself makes it clear that interest payment on the principal amount of the loan isn’t necessary. The conflict is over whether the consideration against the time value of money is a requisite element even after it has been established that the loan disbursed does qualify any one of the various definitions provided in Clauses (a) to (i)of Section 5(8).

The apex court has given conflicting judgements in Pioneer Urban and Jaypee Infrastructure cases, respectively, as explained in the previous subheading of this article. In the present case, the court could’ve settled the interpretation of the principal text within the relevant section once and for all by determining whether a loan that holds up to any of the clauses under Section 5(8) also needs to be necessarily disbursed against the consideration for the time value of money. However, the court did make it clear that the section itself is illustrative, and as such, debts that aren’t defined in the clauses given under the section can still qualify as ‘financial debt.’ under the IBC. The creditor forwarding such debt is qualified to initiate a CIRP. Thus, the issue of consideration for the time value of money and its necessity is the sole topic of debate that remains as far as this provision is concerned.

Author(s) Name: Swastik Shukla (National Law Institute
University, Bhopal)

References:

[1] Insolvency & Bankruptcy Code 2016, Section 7, No. 31, Acts of Parliament, 2016 (India)

[2] Insolvency & Bankruptcy Code 2016, Section 5(7), No. 31, Acts of Parliament, 2016 (India)

[3] Insolvency & Bankruptcy Code 2016, Section 5(8)(f), No. 31, Acts of Parliament, 2016 (India)