Financial debts are a key ingredient in cases involving insolvency and bankruptcy, making it crucial for the term to be properly understood. In cases like Actioncor Consultants Pvt. Ltd. v. Viprah Technologies Ltd. (Company Appeal (AT) (Ins) No. 916/2019) and Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd. (Civil Appeal No. 2231 OF 2021), the National Company Law Appellate Tribunal (NCLAT) and Division Bench of the Supreme Court respectively provided a clarification on the scope of “Financial Debt” as defined in the Insolvency and Bankruptcy Code, 2016, (hereinafter referred to as “IBC”).
In the first case, the NCLAT contemplated whether debt taken by Directors of the corporate debtor in a personal capacity for the purposes of the corporate debtor can be included under the ambit of “financial debt” under S.5(8) of the IBC. In the other, while considering whether a secured creditor extending an interest-free loan qualifies as a financial creditor under S.7 of IBC, the Apex Court read and specifically analyzed the meaning of “financial debt”.
WHAT IS FINANCIAL DEBT?
Financial Debt is defined in section 5, sub-section 8 of the IBC as a debt along with interest, if any, disbursed against the consideration for the time value of money. It can include:
- Money borrowed against the payment of interest;
- Amounts raised by acceptance under acceptance credit facilities or any de-mat equivalents;
- Amounts raised pursuant to any note purchase facility or instruments similar to the issue of bonds, notes, debentures and loan stock;
- The amount of any liability in respect of any lease or hire-purchase contract which is deemed as a finance or capital lease under Indian Accounting Standards or any other such standards as may be prescribed;
- Receivables sold or discounted other than any receivables sold on a non-recourse basis;
- Any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing. Explanation to the sub-clause provides that any amount raised from an allottee under a real estate project shall be deemed to have the commercial effect of a borrowing. Further, the terms “allottee” and “real estate project” shall be defined in accordance with S.2 of the Real Estate (Regulation and Development) Act, 2016.
- Any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;
- Any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;
- The amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of S.5(8).
Any person to whom a financial debt is owed by the corporate debtor is known under S.5(7) of the IBC as a Financial Creditor.
Actioncor Consultants Pvt. Ltd. v. Viprah Technologies Ltd. (2023)
- Mr. Subramanian, Director of the Respondent company, Viprah Technologies Ltd. (hereinafter referred to as “Viprah”), approached Mr. KKM for a loan to pay off the Respondent’s debts.
- Accordingly, Mr. KKM, Mr. Subramanian and Mrs. Sujatha – Managing Director of Viprah entered into an ‘Investment Agreement’ for the loan in July 2010.
- The Agreement required the secured funds to be transferred by the Appellant, Actioncor Consultants Ltd. (hereinafter referred to as “Actioncor”) directly to the secured creditors of Viprah.
- The Respondent made no efforts to repay the loan and committed a default despite repeated reminders from Actioncor. Following this, Actioncor filed for CIRP proceedings against Viprah under S.7 of IBC in 2018.
The Adjudicating Authority held that Actioncor is not a Party to the Investment Agreement as it was entered into by Mr. KKM, Mr. Subramanian and Mrs. Sujatha in their personal capacities. It was also held that the Corporate Debtor did not make any “Promise to repay” the money to the Appellant.
Aggrieved by the impugned order of the NCLT dismissing the application filed under S.7 of IBC, Actioncor preferred an appeal to the NCLAT.
Whether the amount lent to the Directors representing the Corporate Debtor by the Appellant through an Investment Agreement in their personal capacity can be included under the ambit of “Financial Debt” as defined in S.5(8) of the IBC?
RATIONAL (of NCLAT)
The Appellate Tribunal observed that the Corporate Debtor is not a party to the Agreement as it was entered into between Mr. KKM and the two Viprah directors in their personal capacities. This is supported by the language of the dispute resolution clause which requires any dispute between Mr. KKM, Mr. Subramanian and Mrs. Sujatha to be resolved through mediation, thereby implying that the Investment Agreement is expressly between individuals.
The Tribunal further noted the averred fact that the Appellant transferred the agreed amount to the secured creditors of the Respondent company on their instruction. According to S.5(8) of IBC, to be considered a “financial debt”, there must be a direct disbursal of the amount owed from the financial creditor to the corporate debtor.
Since the transactions were never directly with the corporate debtor, the required amount cannot be considered a “financial debt”.
The Court also referred to the judgement in Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Ltd. & Ors. (2020), where it was observed that the essential elements of “financial debt” can be found in Section 5(8) of the IBC which requires a disbursal against the consideration for the time value of money. It can also include the “money borrowed or raised or protected” in any of the ways prescribed in clauses (a) to (i) of the provision.
Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd. (2021)
The Court noted that Section 5(8) of IBS defines “financial debt” as “a debt along with interest, if any, disbursed against the consideration for the time value of money”, and which includes any of the stipulations in sub-clauses (a) to (i). The Apex Court found that the NCLT and NCLAT had overlooked the phrase ‘if any’ in the given definition, that a financial debt refers to the outstanding principal amount which would also include interest, if any was payable.
The Court also referred to S.5(8)(f) which was found to be inclusive and not exhaustive. When read with the principal clause, it states that “financial debt” includes any amount raised under any other transaction having the commercial effect of borrowing.
Further, the Court interpreted the term ‘includes’ in S.5(8) by referencing the decision in Dilworth v. Commissioner of Stamps, [(1899) AC 99], where it was held that the term ‘include’ is used to broaden the scope of a definition. The Court also relied on Anuj Jain Interim Resolution Professional for Jaypee Infratech Ltd. v. Axis Bank Ltd. to note that the scope of the word cannot be so expansive so as to negate the meaning of the legislation.
The Apex Court admitted that while S.5(8) of IBC does not expressly include an interest free loan in the different kinds of financial debt enumerated in S.5(8)(a) to S.5(8)(i), and the term ‘financial debt’ would have to be construed to include interest free loans advanced to finance the business operations of a corporate body. It was held by the court that the disbursal of loan without any assured rate of interest will be included within the definition of a “financial debt” under S. 5(8) of IBC.
Amounts taken by Directors in their personal capacity, despite being intended and used for the purposes of the corporate debtor, is not considered as “Financial Debt” under S.5(8) of the IBC.
This case reiterated the necessity of the element of a direct “disbursement” from the financial creditor to the corporate debtor for a transaction to be considered a “financial debt”. The importance of fulfilling this basic ingredient under S.5(8) of IBC has been previously mentioned in cases like Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Ltd. & Ors. (2020).