Case Note & Summary
The appeal arose under Section 62 of the Insolvency and Bankruptcy Code, 2016 (IBC) against the dismissal by the National Company Law Appellate Tribunal (NCLAT) of an appeal challenging the National Company Law Tribunal (NCLT) order. The appellant, an assignee of a debt, filed a petition under Section 7 of the IBC to initiate Corporate Resolution Process against the respondent corporate debtor, claiming to be a financial creditor. The dispute centered on a term loan of Rs.1.60 crores advanced interest-free by the original lender to the corporate debtor for working capital requirements, with the loan assigned to the appellant. The appellant contended that the debt remained outstanding, but the NCLT rejected the petition, finding the appellant not a financial creditor as the loan was interest-free and lacked consideration for time value of money under Section 5(8) of the IBC. The NCLAT affirmed this decision. The Supreme Court considered the sole issue of whether an interest-free term loan qualifies as a financial debt under the IBC. The appellant argued the loan constituted a financial debt, while the respondent maintained it did not due to the absence of interest. The court analyzed Section 5(8) of the IBC, which defines financial debt as a debt disbursed against consideration for time value of money, including money borrowed against payment of interest. It noted the loan agreement explicitly stated the loan bore nil interest and was unsecured, with repayment due on demand after two years. The court emphasized the onus on the appellant to prove financial creditor status and found no evidence of interest or consideration for time value. Relying on precedents cited by the NCLT, including Dr. B.V.S. Lakshmi vs. Geometrix Laser Solutions Private Limited and Shreyans Realtors Private Limited & Anr. vs. Saroj Realtors & Developers Private Limited, the court held that an interest-free loan does not satisfy the definition of financial debt under Section 5(8) of the IBC. Consequently, the appellant was not a financial creditor and incompetent to initiate proceedings under Section 7. The Supreme Court dismissed the appeal, upholding the orders of the NCLAT and NCLT.
Headnote
A) Insolvency Law - Financial Debt Definition - Interest-Free Loan Not Financial Debt - Insolvency and Bankruptcy Code, 2016, Section 5(8) - Appellant assigned interest-free term loan from original lender to corporate debtor for working capital - NCLT and NCLAT dismissed petition under Section 7 IBC, holding loan lacked consideration for time value of money - Supreme Court upheld dismissal, affirming interest-free loan does not meet definition of financial debt under Section 5(8) IBC - Held that appellant failed to prove financial creditor status as loan agreement specified nil interest and no evidence of interest payable (Paras 1-7).
Issue of Consideration
Whether a person who gives a term loan to a Corporate Person, free of interest, on account of its working capital requirements is a Financial Creditor competent to initiate Corporate Resolution Process under Section 7 of the Insolvency and Bankruptcy Code, 2016
Final Decision
Supreme Court dismissed the appeal, upholding the orders of NCLAT and NCLT, holding that the appellant is not a financial creditor as the interest-free loan does not constitute financial debt under Section 5(8) of the Insolvency and Bankruptcy Code, 2016
Law Points
- Definition of financial debt under Section 5(8) of the Insolvency and Bankruptcy Code
- 2016 requires disbursement against consideration for time value of money
- interest-free loan does not qualify as financial debt
- assignee of debt steps into shoes of original lender
- onus lies on applicant to prove financial creditor status
