Thursday, July 29, 2021

Lender Who Advanced Interest Free Loans To Corporate Body Is Also A Financial Creditor; Can Initiate CIRP: Supreme Court

"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", the bench comprising Justices Indira Banerjee and V. Ramasubramanian observed

The bench further observed that sub-clauses (a) to (i) of Sub-section 8 of Section 5 of the IBC are illustrative and not exhaustive. "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.", the court added.

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 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 free loan. 'Financial Debt' would have to be construed to include interest-free loans advanced to finance the business operations of a corporate body.", the bench said while allowing the appeal.

The judgment also refers to various principles of interpretation of statutes.

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