The Supreme Court (SC) in the recent case of Orator Marketing Pvt. Ltd. vs. SamtexDesinz Pvt. Ltd had to decide whethera lender who has advanced interest-free loans to a corporate body can fall under the definition of financial creditor (‘FC’) and thereby whether such a lender can initiate the Corporate Insolvency Resolution Process (‘CIRP’). The SC ruled that interest is nota sine qua non for a debt to fall within the ambit of financial debt under the Insolvency & Bankruptcy Code, 2016 (‘Code’).
Although, the decision clarifies the point that ‘Interest’ is not a compulsory requirement, it fails to appreciate the principal aspect of the definition of financial debt i.e. the consideration for the time value of money. This Article aims to critically analyze the ruling of the SC in light of the various precedents and argues that interest should be considered as an essential component under the definition of financial debt.
Sameer Sales Private Limited (‘Original Lender’) entered into a Loan Agreement (‘Agreement’) with SamtexDesinz Private Limited (‘Corporate Debtor’/’Respondent’) to advance an interest-free term loan of Rs. 1.60 crores to the corporate debtor. The amount was to be repaid within two years but the corporate debtor (‘CD’) failed to repay the outstanding due. In the meantime, the Original Lender assigned the outstanding loan to Orator Marketing Private Limited (‘Appellant’) and the same was acknowledged by the respondent corporate debtor.
When the amount was due, the appellant sent a demand notice asking for the payment of the outstanding debt but the respondent failed to repay the said amount. Therefore, an application under Section 7 of the Code was filed by applicant seeking initiation of CIRP against respondent. However, the said application was rejected as the National Company Law Tribunal (‘NCLT’)was of the view that the appellant failed to satisfy the twin requirements needed to fall within the definition of ‘financial debt’. These requirements are-:
That there is a debt along with interest, if any, which has been disbursed and such disbursement has been made against the ‘consideration for the time value of money’.
Aggrieved by the Order of the NCLT, appellant approached National Company Law Appellate Tribunal (‘NCLAT’) under Section 61 of the Code. However, NCLAT affirmed NCLT’s view and dismissed the appeal, holding that for a loan to qualify as financial debt it should have consideration for the time value of money and the consideration should be for the FC and not the CD. Therefore, an appeal was filed by the appellant before the Hon’ble SC against the Order of NCLAT.
ANALYSIS OF THE SUPREME COURT’S REASONING
The SC accepted the appeal and ruled that any interest-free transaction is well within the ambit of Financial Debt mentioned under Section 5(8) of the Code. The observations of the Court were mainly based on two grounds-:
USAGE OF THE WORDS ‘IF ANY’ IN SECTION 5(8) WIDENS THE SCOPE OF FINANCIAL DEBT
The SC observed that the NCLT and NCLAT have misconstrued the definition of ‘financial debt’ mentioned under Section 5(8) by limiting its scope only to debts which are borrowed against the payment of interest. The Court relying on the definition of ‘financial debt’ as a debt along with interest, if any, which is disbursed against the consideration for the time value of money pointed out the significance of the words “if any”. The Court concluded that both the NCLT & NCLAT overlooked the relevance of the words ‘if any’ and therefore were not able to appreciate the fact that even if there is no interest payable on the loan, only the outstanding principal would also qualify as a financial debt.
EXPRESSION ‘INCLUDES’ UNDER SECTION 5(8): AN ILLUSTRATIVE NOT AN EXHAUSTIVE PROVISION
The Court further invalidated the Orders of NCLT and NCLAT because they interpreted the meaning of financial debt non-contextually and in isolation. The Court pronounced that when a doubt about the construction and/or interpretation of a statute’s provision arises, the provision must be read in the context of the statute. The legislative intent and objective, as well as the reasoning and spirit must be determined by the language employed by the legislature.
The Court advocated that in a statute, legislature has the authority to give either limited or expansive construction to the definition of a provision. When the provision is defined to ‘include’ anything, the definition is prima facie broad. Based on this reasoning, the SC adjudged that the definitions of ‘financial creditor’ and ‘financial debt’ reveal that a financial debt is a loan plus interest, if any, that is disbursed in consideration for the time value of money. However, it may also include money borrowed or raised in any of the ways specified in Section 5(8) or in any other way, as Section 5(8) is an inclusive provision, alternatively, sub-clauses (a) to (i) of Section 5(8) are illustrative in nature rather than exhaustive.
In ruling this, the SC relied on Dilworth v. Commissioner of Stamps  A.C. 99 (New Zealand P.C.)which stated that the word ‘include’ is frequently employed in interpretation clauses to broaden the meaning, and when it is used in this way, these words or phrases must be interpreted as encompassing not only what they naturally indicate, but also what the interpretation clause specifies they shall include.
Therefore, the Court ruled that since the disbursal against the consideration for the time value of money is the fundamental characteristic of a financial debt which may include any of the modes prescribed in sub-clauses (a) to (i) of Section 5(8)1, the interest-free loan advanced to respondent will also be termed as financial debt.
Although the Court in the present case has very clearly stated that a debt with no interest component is a financial debt, this judgment of the Hon’ble SC must be understood in the context of different conflicting NCLT and NCLAT rulings. There are multiple NCLAT rulings which emphasize the importance of interest component in the determination of the existence of a financial debt.2 In Shreyans Realtors Pvt. Ltd. vs. Saroj Realtors & Developers Pvt. Ltd., the NCLAT pronounced that if the CD never agreed to the interest component of the agreement and never paid or agreed to return the loan with interest, the loan will not be considered as financial debt, and the creditor will not be referred to as a FC.
The NCLAT in Monica Ramesh Shah v. Al Fara’A Properties Ltd ruled that ‘Consideration for the time value of money’ is the fundamental characteristic of the financial debt3 wherein expression ‘time value of money’ includes interest. Further, the NCLAT in Narendra Kumar Agarwal vs. Monotrone Leasing Pvt. Ltd clearly pointed that the interest constitutes the essential component of the time value of money. Even the Insolvency Committee Report of 2018 shows that the time value of money comprises two components: either interest or factoring of discount in payment. As a result, in order for a debt to be disbursed in consideration of the time value of money, it must have an interest component. Additionally, the Hon’ble SC failed to appreciate the reasoning given by the NCLAT in the present case. NCLAT in its judgment ruled that ‘consideration for the time value of money’ is for the sake of FC and not CD. In this scenario, the agreement was interest-free and the CD was solely obliged to return the principal amount even beyond the contract’s maturity. Hence, there was no consideration for the FC against the time value of money.
The SC has, however, demystified the conundrum surrounding the word ‘interest’ before the phrase ‘if any’ in the definition of financial debt by ruling that Section 7 application can be filed even if no interest is attached with the debt. However, more clarity is needed on the phrase ‘time value of money’. Therefore, in light of the various NCLT and NCLAT’s rulings referred to, the authors strongly claim that the SC’s judgment in the present case has not cleared the mist over the question of interest not being an essential part of financial debt, rather, it has raised a number of confusing issues that will seek judicial scrutiny.
In order for an interest-free debt to qualify as Financial Debt, a FC must show that the funds were disbursed with ‘consideration for time value of money.’ The question of what constitutes ‘time value of money’ varies depending on the facts and circumstances; nonetheless, the FC must demonstrate that it had an interest in the subject matter for which the loan was disbursed and was profiting from it.
The ruling of the SC will have detrimental consequences as the court neglected the requirement for a debt to qualify as ‘financial debt’ i.e. disbursal against the consideration for the time value of money. Therefore, this judgment failed to clarify the issue of interest-free loans under the Code.