A person who advanced interest free loans to corporate body is also a financial creditor and can initiate CIRP

In M/s Orator Marketing Pvt. Ltd vs M/s Samtex Desinz Pvt. Ltd, the short question involved in this Appeal is, whether a person who gives a term loan to a Corporate Person, free of interest, on account of its working capital requirements is not a Financial Creditor, and therefore, incompetent to initiate the Corporate Resolution Process under Section 7 of the IBC.

M/s Sameer Sales Private Limited (Original Lender), advanced a term loan of Rs.1.60 crores to the Corporate Debtor for a period of two years, to enable the Corporate Debtor to meet its working capital requirement. The Original Lender has assigned the outstanding loan to the Appellant. 4. According to the Appellant the loan was due to be repaid by the Corporate Debtor in full within 01.02.2020. The Appellant claims that the Corporate Debtor made some payments, but Rs.1.56 crores still remain outstanding. 5. The Appellant filed a Petition under Section 7 of the IBC in the NCLT for initiation of the Corporate Resolution Process. 

The petition was, however, rejected by the NCLT as well as NCLAT stating that mere grant of loan and admission of taking loan will ipso fact not treat the applicant as Financial Creditor within the meaning of Section 5(8) of the Code. "in the present case neither the loan agreement has any provision regarding the payment of interest not there is any supporting evidence/document to establish applicable rate of interest to be paid on the said loan. The applicant has failed to prove that the loan was disbursed against consideration for time value of money, particularly when respondent company has affirmed that no interest has been paid not payable at any point of time. 

Disagreeing with and setting aside the orders, the Supreme Court held that in construing and/or interpreting any statutory provision, one must look into the legislative intent of the statute. The intention of the statute has to be found in the words used by the legislature itself. In case of doubt, it is always safe to look into the object and purpose of the statute or the reason and spirit behind it. Each word, phrase or sentence has to be construed in the light of the general purpose of the Act itself, as observed by Mukherjea, J. in Poppatlal Shah Vs. State of Madras AIR 1953 SC 274, and a plethora of other judgments of this Court. To quote Krishna Iyer, J, the interpretative effort must be illumined by the goal, though guided by the words. 

When a question arises as to the meaning of a certain provision in a statute, the provision has to be read in its context. The statute has to be read as a whole. The previous state of the law, the general scope and ambit of the statute and the mischief that it was intended to remedy are relevant factors. 

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 eligibility of a person, to initiate the Corporate Insolvency Resolution Process, if questioned, has to be adjudicated upon consideration of the key words and expressions in the aforesaid Section and other related provisions.

The definition of financial debt in Section 5(8) of the IBC has been quoted above. Section 5(8) defines financial debt to mean 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, as per Section 5(8) (a) of the IBC. The definition of financial debt in Section 5(8) includes the components of sub-clauses (a) to (i) of the said Section.

The NCLT and NCLAT have overlooked the words "if any" which could not have been intended to be otiose. Financial debt means outstanding principal due in respect of a loan and would also include interest thereon, if any interest were payable thereon. If there is no interest payable on the loan, only the outstanding principal would qualify as a financial debt. Both NCLAT and NCLT have failed to notice clause(f) of Section 5(8), in terms whereof financial debt includes any amount raised under any other transaction, having the commercial effect of borrowing. 23. Furthermore, sub-clauses (a) to (i) of Sub-section 8 of Section 5 of the IBC are apparently illustrative and not exhaustive. Legislature has the power to define a word in a statute. Such definition may either be restrictive or be extensive. Where the word is defined to include something, the definition is prima facie extensive. ."