Summary
The Court held that an interest-free term loan advanced to finance a corporate debtor’s working-capital needs could be a financial debt. The tribunals had wrongly treated the absence of interest as excluding the lender’s assignee from financial-creditor status. The words if any and the inclusive borrowing provision in Section 5(8) had to be given effect. The rejection orders were set aside and the Section 7 petition revived for fresh decision; insolvency admission was not itself directed.
Issues
- Whether absence of interest excluded a working-capital term loan from financial debt and prevented its assignee from invoking Section 7.
Provisions considered
- Sections 5(7), 5(8) and 7, Insolvency and Bankruptcy Code, 2016Interest was not mandatory for this business-financing loan to qualify; the assignee’s application required reconsideration under the proper definition. (¶¶ 15, 17, 20, 21, 22, 23, 28, 29, 31, 32)
Held
- The definition of financial debt must be read with the Code’s related definitions and scheme. Its words if any make interest optional: where no interest is payable, the outstanding principal can qualify. The lower tribunals overlooked those words and the clause covering transactions with the commercial effect of borrowing. (¶¶ 8, 15, 20, 21, 22)
- Section 5(8)’s listed transactions are illustrative rather than exhaustive. The Court did not dispense with the essential features of financial debt; it distinguished third-party security from a term loan advanced for the debtor’s own business operations. The latter plainly had the commercial effect of borrowing despite carrying no interest. (¶¶ 23, 27, 28, 29, 31)
- A financial creditor includes a person to whom the financial debt has legally been assigned. The assignee could not be excluded solely because the underlying working-capital loan was interest free. (¶¶ 2, 3, 18, 20, 22, 31)
- Both rejection orders were set aside and the Section 7 petition revived for fresh adjudication in accordance with law and the Court’s interpretation. The Court did not itself order admission of the insolvency application. (¶ 32)
Result
Appeal allowed; NCLAT and NCLT rejection orders set aside, and the Section 7 petition revived for fresh decision.