23 August 2021
Matter: Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd.
Order dated: 26 July 2021
Summary: The issue before the SC was whether a person giving a term loan to a Corporate Person, free of interest, is a financial creditor, and would qualify to initiate CIRP under the Code. The NCLT, New Delhi Bench and NCLAT had both held that since the loan was interest free, the same could not be termed as a ‘financial debt.’
SC relied on the definition of ‘financial debt’ under the Code which is defined as “a debt along with interest, if any, which is disbursed against the consideration of the time value of money and includes money borrowed against the payment of interest.” SC held that the NCLT, New Delhi Bench and the NCLAT had overlooked the words “if any”. SC also observed that both NCLAT and NCLT, New Dei Bench had failed to notice that the definition of ‘financial debt’ under the Code also includes “any amount raised under any other transaction, having the commercial effect of borrowing.” The SC explained that a ‘financial debt’ would mean outstanding principal due in respect of a loan and would also include interest, if any. However, if no interest were payable on the loan, only the outstanding principal amount would qualify as a ‘financial debt’ under the Code.
Therefore, SC held that the definition of ‘financial debt’ under the Code does not expressly exclude an interest free loan and ‘financial debt’ would have to be construed to include interest free loans advanced to finance the business operations of a corporate body.
For further information, please contact:
Souvik Ganguly, Partner, Acuity Law
al@acuitylaw.co.in
