Case Analysis: M/s Orator Marketing Pvt. Ltd vs. M/s Samtex Desinz Pvt. Ltd. – By Purbasha Panda

Case Analysis: M/s Orator Marketing Pvt. Ltd vs. M/s Samtex Desinz Pvt. Ltd.
Civil Appeal No. 2231 of 2021
Case Citation: (2021) 68 SC

– By Purbasha Panda, Associate at ZEUS Law Associates

A. Brief Background of the Facts

On 26th July, 2021, a Division Bench of the Hon’ble Supreme Court consisting of Indira Banerjee J. and V. Ramasubramanian J. delivered a landmark judgement upholding that interest free loans would fall under the definition of ‘Financial Debt’ as defined under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (‘IBC’).

This civil appeal before the Hon’ble Supreme Court arises out of an Order dated 08.03.2021 of the Hon’ble National Company Law Appellate Tribunal (‘NCLAT’), reported at (2021) 116 NCLAT, whereby the Hon’ble Appellate Authority had dismissed the Appeal filed by the Appellant and had upheld the Order dated 23.10.2020 delivered by the Hon’ble NCLT, New Delhi wherein the Hon’ble NCLT had refused to admit a Section 7 Application filed by the Appellant, on the ground that the Loan disbursed by the Financial Creditor to the Corporate Debtor is in the nature of an interest free-loan which is excluded from the definition of ‘Financial Debt’ under Section 5(8)(f) of the Code.

  • Factual details regarding Disbursement of Loan by the Financial Creditor to the Corporate Debtor

M/S Sameer Sales Private Limited, is the ‘Original Lender’ in the aforementioned case. It advanced a term loan of Rs. 1.60 Crores to M/s Samtex Desinz Private Limited (‘Corporate Debtor’) without any interest for a period of two years from the date of execution of the Loan agreement entered between M/S Sameer Sales Private Limited and M/S Samtex Desinz Private Limited (‘parties’). The Loan Agreement was entered between the parties on 20.01.2018 and the Loan was due and payable after 20.01.2021. It is pertinent to mention here that the parties herein are sister concerns and that M/S Samtex Desinz Private Limited had taken a loan of Rs. 14,00,00,000 (Rupees Fourteen Crore Only) from M/S Tata Capital Financial Services Limited (‘Institutional Lender’) and thus it mortgaged all the assets in favour of the Institutional lender. However, this loan facility was not sufficient to meet the working capital requirements of the Corporate Debtor. Therefore, the M/S Samtex Desinz Private Limited (‘Corporate Debtor’) decided to avail an interest free loan of Rs. 1.60 Crore from its sister concern, which is the Original Lender.

It is crucial to mention here that this loan disbursed by the Original Lender was later assigned by it to M/s. Orator Marketing Private Limited (‘Financial Creditor’).

  • Background of the Proceedings at Hon’ble NCLT and NCLAT

The Financial Creditor filed a Section 7 Application under the Code before the Hon’ble NCLT, New Delhi. The Hon’ble NCLT rejected the Application vide its Order dated 01.02.2020.  The primary question before the Hon’ble Adjudicating Authority was ‘Whether the interest free loan of Rs. 1.60 Crores disbursed by the Original Lender to the Corporate Debtor is in nature of Financial Debt as defined under Section 5(8) of the Code?’

The Hon’ble Adjudicating Authority relied on a decision of the Hon’ble NCLT i.e Dr. B.V.S Lakshmi Vs. Geometrix Laser Solutions Private Limited and a decision of the Hon’ble NCLAT i.e Shreyans Realtors Private Limited & Anr Vs. Saroj Realtors & Developers Private Limited, Company Appeal (AT) (Insolvency) No. 311 of 2018 and held the view when the Corporate Debtor never accepts the component of interest in relation to a debt, then that particular debt cannot be termed as a ‘Financial Debt’ within the meaning of Section 5(8) of the Code.

Being aggrieved by the Order of the Hon’ble NCLT, the Appellant filed an Appeal before the Hon’ble NCLAT.

The Hon’ble NCLAT perused the statutory definition of ‘Financial Debt’ enumerated in the Code and interpreted the same with respect to the relevant Clauses in the Loan Agreement. A bare perusal of the provisions of the Loan Agreement provides that- (a) Under the Loan Agreement, the Lender has extended to the borrower a term loan of Rs. 1,60,00,000.00 (Rupees One Crore Sixty Lakh) (‘Term Loan’) for a period of two years commencing from the date of signing of the Agreement.  (b) That the Term Loan is an unsecured loan. (c) That the Loan shall bear no interest. The Hon’ble NCLAT took the view that money borrowed against the payment of interest comes within the definition of ‘Financial Debt’

The judgement and Order of the Hon’ble NCLT was affirmed by the Hon’ble NCLAT.

  • View of the Hon’ble Apex Court

The Hon’ble Apex Court viewed that Hon’ble NCLAT and NCLT have misconstrued the definition of ‘Financial Debt’ and have read it in isolation, in a very pedantic manner. The Hon’ble Apex Court meticulously analysed the definition of ‘Financial Debt’. It quoted the definition of ‘Financial Debt’ under Section 5(8)(f). Section 5(8)(f) defines ‘Financial Debt’ to mean “a debt along with interest if any which is disbursed against the consideration for time value of money”. It caught hold of the word ‘if any’. The Hon’ble Apex expressed the view that ‘Financial Debt’ means outstanding principal due in respect of a loan and would also include an interest thereon, if any interest were payable and if there is no interest payable on the loan, then only the outstanding will qualify as a ‘Financial Debt’.

 It analysed Section 5(8)(f) and observed that the scope of the definition of ‘Financial Debt’ enumerated under Section 5(8)(f) is inclusive and not exhaustive. Section 5(8)(a) which provides for money borrowed against payment of interest, inclusively comes under the purview of the definition of ‘Financial Debt’. The Hon’ble Apex Court observed that, sub clauses (a) to (i) of sub-section 8 of Section 5 of the Code are apparently illustrative and not exhaustive.

The Hon’ble Apex Court relied on a couple of judgements to interpret the word ‘include’.  It relied on a Privy Council judgement that is Dilworth Vs. Commissioner of Stamps, 5(1899) AC 99. In this judgement, the Privy Council had expressed the view that, “The word ‘include’ is  generally used in interpretation clause in order to enlarge the meaning and when it is so used these words and phrases must be construed as comprehending, not only such things as they signify from their natural import, but also those as things which the interpretation clause declares that they shall include. But the word ‘include’ is suspectible of another construction, which may become imperative, if the context of the act is sufficient to show that it was not merely employed for the purpose of adding to the natural significance of the words or the expressions defined. It may be equivalent to mean and include’, and in the case it may afford an exhaustive explanation of the meaning which, for the purposes of the Act, must invariably be attached to words and expressions.”

The Hon’ble Apex Court was, however careful and cautioned that the scope of the term ‘means and includes’ cannot be so expansive so as to defeat the purpose of a statute. On this point, it relied on Anuj Jain Interim Resolution Professional for Jaypee Infratech Ltd. Vs. Axis Bank Ltd, 8(2020) 8 SCC 401. In this case, the Hon’ble Apex Court speaking through Maheswari J. referred to various precedents on restrictive and expansive interpretation of words and phrases used in a statute, particularly the words ‘means’ and ‘includes’ and held that- “The requirement of existence of a debt, which is disbursed against the consideration for the time value of money, is an essential ingredient for existence of debt, which is disbursed against consideration for time value of money. In any case, the definition, by its frame cannot be read so expansive, rather infinitely wide, that the root requirements of disbursements against the consideration for time value of money could be forsaken in a manner that any financial transaction could stand alone to become a financial debt”.

The Hon’ble Apex Court interpreted Section 5(8) and held that “money borrowed against payment of interest” is one of a kind of financial debt, under the various kinds of financial debt are enumerated under Section 5(8)(a) to Section 5(8)(i). The Hon’ble Apex Court finally held that the definition of ‘Financial Debt’ in Section 5(8) of the Code does not expressly exclude an interest free loan. The Hon’ble Apex Court held that ‘Financial Debt’ would have to be construed to include interest free loans advanced to finance the business operations of a corporate body.

B. Analysis

However, the question that arises here is in the present set of facts is ‘What was actually the consideration for time value of money in the present transaction? The term ‘time value of money’ essentially means that the money that one might have now,  would have more worth than its present value in future.

In this case, there is a entity which has taken a loan from an institutional lender and has mortgaged all his assets, however the loan taken is not sufficient to meet his working capital requirements. So now to fix the same, he has taken an unsecured term loan from one of its sister concerns without any interest (This term loan was though later assigned to the Appellant). So the question arises, what exactly is the consideration for time value of money in this case?  The Judgement does not answer this question very elaborately rather it doesn’t undertake an extensive analysis of the nature of the financial transaction between the parties. It can be presumed that the entity would meet his working capital requirements through the term loan advanced by his sister concern and generate some profit. The question that arises is “Would the profit generated by the entity with the help of monies received through the term loan advanced by its sister concern is the consideration in nature of time value of money?”. The judgement does not sufficiently elaborate on this aspect.


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