Supreme Court of India
M/S Orator Marketing Pvt. Ltd. vs M/S Samtex Desinz Pvt. Ltd. on 26 July, 2021Author: Hon’Ble Ms. Banerjee

Bench: Hon’Ble Ms. Banerjee, V. Ramasubramanian








M/S SAMTEX DESINZ PVT. LTD. … Respondent(s)


Indira Banerjee, J.

This appeal under Section 62 of the Insolvency and

Bankruptcy Code, 2016 (hereinafter referred to as the IBC) is

against the final judgment and order of the National Company

Law Appellate Tribunal (NCLAT), New Delhi in Company

Application (AT)(Insolvency) No. 1064 of 2020 dated 08-03-

2021, whereby the NCLAT has been pleased to dismiss the appeal

of the Appellant and confirmed the order dated 23.10.2020 of

the Adjudicating Authority, i.e., the National Company Law

Tribunal (NCLT), New Delhi, dismissing the petition being

CP(IB) No. 908/ND/2020, filed by the Appellant under Section 7

of the IBC with the finding that the Appellant is not a
Signature Not Verified

Digitally signed by
Date: 2021.07.29
financial creditor of the Respondent. The Appellant is an
13:13:36 IST

assignee of the debt in question.

2. 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.

3. M/s Sameer Sales Private Limited, hereinafter referred to

as to “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 a judgment and

order dated 23.10.2020. The Adjudicating Authority (NCLT)

held :

“11. Heard the parties and perused the case records.

12. There is no dispute that the applicant initially had
disbursed the amount interest free to the respondent company.
A perusal of the application it is clear that the loan was
given interest free.


15. 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.

17. In the application the applicant himself has submitted
that the loan was interest free. ….

20. It is well settled that the onus lies on the applicant
to establish that the loan was given against the consideration
for time value of money. Onus to prove also lies on the
applicant to establish that the debt claimed in the
application comes within the purview of ‘financial debt’ and
that the applicant is a financial creditor’ in respect of the
present claim in question. Applicant has miserably failed to
substantiate with supporting documentary evidence that
interest, as claimed at Part-V of the application, is payable
as per the agreed loan covenants.

21. Hon’ble NCLT in the matter of Dr. B.V.S. Lakshmi vs.
Geometrix Laser Solutions Private Limited has observed that
“fc/- coming within the definition of ‘Financial Debt’ as
defined under sub-section (8) of Section 5 the Claimant is
required to show that (I) there is a debt along with interest,
if any, which has been disbursed and (ii) such disbursement
has been made against the ‘consideration for the time value of

22. It is reiterated that 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.

23. Similarly, in the matter of Shreyans Realtors Private
Limited & Anr. vs. Saroj Realtors & Developers Private Limited
Company Appeal (AT) (Insolvency) No.311 of 2018, vide its
order dated 04.07.2018 Hon’ble NCLAT has observed that when
corporate debtor never accepted the component of interest and
has given no undertaking to repay the loan with interest; the
Appellants cannot claim to ow ‘financial debt’ from the
‘Corporate Debtor’ and thereby cannot be claimed to be a
‘Financial Creditor’ as defined under Section 5(7) & (8) of
the Insolvency and Bankruptcy Code, 2016.

24. Therefore, neither the present claim can be termed to
be a ‘financial debt’ nor does the applicant come within the
meaning of ‘financial creditor’. Once the applicant does not
come within the meaning of ‘financial creditor’ he becomes
ineligible to file the application under Section 7 of the
Insolvency Code 2016.

25. for the reasons stated above this petition fails and
the same stands dismissed as not maintainable.”

6. Being aggrieved, the Appellant filed an appeal under

Section 61 of the IBC. The appeal has been dismissed by the

NCLAT, by the judgment and order impugned before this Court.

7. The relevant part of the impugned judgment and order is

extracted hereinbelow for convenience:

“5. We have heard Counsel for both sides and perused the
Appeal and the Reply filed by the Respondent. The fact that
loan was advanced to the Respondent, is not in dispute. The
narrow question involved is whether the transaction concerned
can be treated as a transaction of Financial Debt as defined
in Section 5(8) of IBC. The definition of “Financial Debt”
under IBC Section 5(8) reads as under:-

“(8) “financial debt” means a debt alongwith interest,
if any, which is disbursed against the consideration
for the time value of money and includes—

(a) money borrowed against the payment of interest;

(b) any amount raised by acceptance under any
acceptance credit facility or its de-materialised

(c) any amount raised pursuant to any note purchase
facility or the issue of bonds, notes, debentures,
loan stock or any similar instrument; Company Appeal
(AT) (Ins) No.1064 of 2020;

(d) the amount of any liability in respect of any
lease or hire purchase contract which is deemed as a
finance or capital lease under the Indian Accounting
Standards or such other accounting standards as may be

(e) receivables sold or discounted other than any
receivables sold on non-recourse basis;

(f) any amount raised under any other transaction,
including any forward sale or purchase agreement,
having the commercial effect of a borrowing;

Explanation.—For the purposes of this sub-clause,—

(i) any amount raised from an allottee under a real
estate project shall be deemed to be an amount having
the commercial effect of a borrowing; and

(ii) the expressions, “allottee” and “real estate
project” shall have the meanings respectively assigned
to them in clauses (d) and (zn) of section 2 of the
Real Estate (Regulation and Development) Act, 2016 (16
of 2016);]

(g) any derivative transaction entered into in
connection with protection against or benefit from
fluctuation in any rate or price and for calculating
the value of any derivative transaction, only the
market value of such transaction shall be taken into

(h) any counter-indemnity obligation in respect of a
guarantee, indemnity, bond, documentary letter of credit
or any other instrument issued by a bank or financial

(i) the amount of any liability in respect of any of
the guarantee or indemnity for any of the items
referred to in sub-clauses (a) to (h) of this clause;”
Company Appeal (AT) (Ins) No.1064 of 20206 IBC
separately defines debt under Section 3(11) as under:-

“(11) “debt” means a liability or obligation in respect of
a claim which is due from any person and includes a
financial debt and operational debt;”

It is apparent that there can be debts which do not
necessarily fall in the definition of financial debt or
operational. Money borrowed against payment of interest
comes within the definition financial debt. However, if the
money borrowed is not against payment of interest, under
the definition of financial debt, the core requirement is
to find whether there is “consideration for the time value
of money”. The facts of the matter disclose and the Appeal
also records that when the Corporate Debtor was unable to
get any further loan from the market after having taken
loan from M/s. Tata Capital Financial Services Ltd., M/s.
Sameer Sales which was related party to the Corporate
Debtor, extended interest free unsecured loan to the
Corporate Debtor payable on or after 1 st February, 2020 and
that too upon demand by the lenders. It would be
appropriate to reproduce the Loan Agreement itself to
understand the same. The Loan Agreement (Annexure A-2)
reads as under:-



20th DAY JANUARY Two thousand Eighteen.


registered under the Companies Act, 1956 bearing CIN
No. U51900DL1992PTC047363, having registered office at
122, Tribunal Complex, Ishwar Nagar, Mathura Road, New
Delhi-110065, represented by its director, Kamlesh
Rani Bhardwaj hereinafter referred to the “Lender”
which expression shall mean and include is nominees,
assigns or successors, from time to time.


(2) M/S Samtex Desinz Private Limited, a company

registered under the Companies Act, 1956 bearing CIN
No. U18209DL2017PTC320315, having registered office at
A-36, Hoisery Complex Phase 2 NOIDA U.P. represented
by its director Mr. Sumeer Duggal, hereinafter
referred to the “Borrower” which expression shall mean
and include its nominees assigns or successors from
time to time.


1. That whereas consequent to the purchase of the
business ( except liabilities) of M/s. Samtex Desinz
(Proprietorship Firm) the Borrower had availed of a
term loan of Rs. 14,00,00,000.00 (Fourteen Crore Only)
form M/S Tata Capital Financial Services Ltd., vide
which all the assets of the Borrower have been
mortgaged/assigned in favour of the aforesaid
institutional lender. That the aforesaid terms
facility is insufficient to cover certain working
capital requirement of the Borrower and is
insufficient to meet other requirement relating to
payments stamps duty etc. of



Director/Autho. Sign

the Borrower and that therefore there is a shortfall
of 2,00,00,000.00 (Two Crore Only)

2. That because of the aforesaid loan from the M/s Tata
Capital no other institutions. Willing to extend
unsecured loan to the Borrower, and therefore it is
agreed that the lender is agreeable to extend a loan
of Rs. 1,60,00,000.00 (One Crore Sixty Lakh Only) in
favour of the Borrower.


1. The Lender agrees to extend to the Borrower a term
loan Rs. 1,60,00,000.00 (One Crore Sixty Lakh Only)
for a period of two years commencing form the date of
signing of this agreement.

2. The aforesaid amount shall become due and payable
01-02-2020 or upon demand by the lender.

3. That having regard to the status of the parties, the
present loan is being extended without any charge on
any of the assets at present or in the future.

4. Commencing of the date of this Agreement, the Loan
shall bear NIL interest.

5. Notwithstanding anything contained in this
agreement, the loan amount shall become immediately
due and payable at any time on or after the expiry of
a period of two years i.e. on or after 01/02/2020 upon
demand by the Lender.

6. The Borrower agrees that so long as the loan as in

outstanding the Borrower will inform the Lender in any
change in the constitution of the Borrower.

7. The Borrower shall repay the entire loan on or
before 04/02/2020 and that till such a time the entire
amount is not repaid the terms of the present
agreement shall remain in force. The Borrower is
entitled to pre-pay the loan amount at any time,
without any penalty, after giving the lender notice in
writing of its intention of the same.

8. The agreement shall remain in force of the term
indicated in Clause 7 above unless terminated earlier
in accordance with Clause 7.

9. All notices under this agreement shall be in writing
and shall be either delivered via special messenger
and hand and upon the addresses as may be advised from
time to time by either party.

10. The agreement shall be governed by Indian Law
and the Courts of Delhi shall have jurisdiction to
settle any dispute arising out of or in connection
with this agreement. For the Borrower

SamtexDesinzPvt Ltd For the Lender

Director Director

Witness :

When we read the background as recorded in
paragraphs – 1 and 2 of the above Loan Agreement, it
is clear that the sister concern which extending the
loan did not record anything other than the problem of
the Corporate Debtor, for granting the loan. It is
merely recorded that because of taking loan from M/s.
Tata Capital Financial Services Ltd., no other
institution is willing to extend unsecured loan to the
Corporate Debtor “and therefore”, the lender had
agreed to extend the loan of Rs. 1,60,00,000/- to the
borrower (i.e. Corporate Debtor). Then the above
Agreement refers terms and conditions.

Appeal para-7(d) as under :-

“d. In these circumstances to ensure continued
development of the business of the Corporate Debtor,
Mr. Sameer Bharadwaj, the then Director and the
Current Authorized Signatory of the Respondent,
through the sister concern advanced a sun of Rs. 1.60
Crore. It is submitted that in compliance with the
law, the aforesaid sum was extended under a loan
agreement, however the sum was advanced interest free,
since the development of the business was enough
consideration for time value of money.”

8. The judgment and order of the NCLAT, affirming the

judgment and order of the Adjudicating Authority (NCLT) and

dismissing the appeal is patently flawed. Both the NCLAT and

NCLT have misconstrued the definition of ‘financial debt’ in

Section 5(8) of the IBC, by reading the same in isolation and

out of context.

9. 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 Madras1, 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”.

10. 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


1 AIR 1953 SC 274

11. In Innoventive Industries Ltd. Vs. ICICI Bank Ltd. 2,

authored by Nariman, J., this Court analysed the scheme of the

IBC and held:

“27. The scheme of the Code is to ensure that when a
default takes place, in the sense that a debt becomes
due and is not paid, the insolvency resolution process
begins. Default is defined in Section 3(12) in very
wide terms as meaning non-payment of a debt once it
becomes due and payable, which includes non-payment of
even part thereof or an instalment amount. For the
meaning of “debt”, we have to go to Section 3(11),
which in turn tells us that a debt means a liability of
obligation in respect of a “claim” and for the meaning
of “claim”, we have to go back to Section 3(6) which
defines “claim” to mean a right to payment even if it
is disputed. The Code gets triggered the moment default
is of rupees one lakh or more (Section 4). The
corporate insolvency resolution process may be
triggered by the corporate debtor itself or a financial
creditor or operational creditor. A distinction is made
by the Code between debts owed to financial creditors
and operational creditors. A financial creditor has
been defined under Section 5(7) as a person to whom a
financial debt is owed and a financial debt is defined
in Section 5(8) to mean a debt which is disbursed
against consideration for the time value of money. As
opposed to this, an operational creditor means a person
to whom an operational debt is owed and an operational
debt under Section 5(21) means a claim in respect of
provision of goods or services.

28. When it comes to a financial creditor triggering
the process, Section 7 becomes relevant. Under the
Explanation to Section 7(1), a default is in respect of
a financial debt owed to any financial creditor of the
corporate debtor — it need not be a debt owed to the
applicant financial creditor. Under Section 7(2), an
application is to be made under sub-section (1) in such
form and manner as is prescribed, which takes us to the
Insolvency and Bankruptcy (Application to Adjudicating
Authority) Rules, 2016. Under Rule 4, the application
is made by a financial creditor in Form 1 accompanied
by documents and records required therein. Form 1 is a
detailed form in 5 parts, which requires particulars of
the applicant in Part I, particulars of the corporate
debtor in Part II, particulars of the proposed interim
resolution professional in Part III, particulars of the
financial debt in Part IV and documents, records and
2 (2018) 1 SCC 407

evidence of default in Part V. Under Rule 4(3), the
applicant is to dispatch a copy of the application
filed with the adjudicating authority by registered
post or speed post to the registered office of the
corporate debtor. The speed, within which the
adjudicating authority is to ascertain the existence of
a default from the records of the information utility
or on the basis of evidence furnished by the financial
creditor, is important. This it must do within 14 days
of the receipt of the application. It is at the stage
of Section 7(5), where the adjudicating authority is to
be satisfied that a default has occurred, that the
corporate debtor is entitled to point out that a
default has not occurred in the sense that the “debt”,
which may also include a disputed claim, is not due. A
debt may not be due if it is not payable in law or in
fact. The moment the adjudicating authority is
satisfied that a default has occurred, the application
must be admitted unless it is incomplete, in which case
it may give notice to the applicant to rectify the
defect within 7 days of receipt of a notice from the
adjudicating authority. Under sub-section (7), the
adjudicating authority shall then communicate the order
passed to the financial creditor and corporate debtor
within 7 days of admission or rejection of such
application, as the case may be.

29. The scheme of Section 7 stands in contrast with the
scheme under Section 8 where an operational creditor
is, on the occurrence of a default, to first deliver a
demand notice of the unpaid debt to the operational
debtor in the manner provided in Section 8(1) of the
The moment there is existence of such a dispute, the
operational creditor gets out of the clutches of the

30. On the other hand, as we have seen, in the case of
a corporate debtor who commits a default of a financial
debt, the adjudicating authority has merely to see the
records of the information utility or other evidence
produced by the financial creditor to satisfy itself
that a default has occurred. It is of no matter that
the debt is disputed so long as the debt is “due” i.e.
payable unless interdicted by some law or has not yet
become due in the sense that it is payable at some fu-
ture date. It is only when this is proved to the satis-
faction of the adjudicating authority that the adjudi-
cating authority may reject an application and not oth-

12. In Swiss Ribbons Pvt. Ltd. And Anr. Vs. Union of India

and Others3, this Court speaking through Nariman, J. held :

“27. As is discernible, the Preamble gives an insight
into what is sought to be achieved by the Code. The
Code is first and foremost, a Code for
reorganisation and

insolvency resolution of corporate debtors. Unless such
reorganisation is effected in a time-bound manner, the
value of the assets of such persons will deplete.
Therefore, maximisation of value of the assets of such
persons so that they are efficiently run as going
concerns is another very important objective of the
Code. This, in turn, will promote entrepreneurship as
the persons in management of the corporate debtor are
removed and replaced by entrepreneurs. When, therefore,
a resolution plan takes off and the corporate debtor is
brought back into the economic mainstream, it is able
to repay its debts, which, in turn, enhances the
viability of credit in the hands of banks and financial
institutions. Above all, ultimately, the interests of
all stakeholders are looked after as the corporate
debtor itself becomes a beneficiary of the resolution
scheme—workers are paid, the creditors in the long run
will be repaid in full, and shareholders/investors are
able to maximise their investment. Timely resolution of
a corporate debtor who is in the red, by an effective
legal framework, would go a long way to support the
development of credit markets. Since more investment
can be made with funds that have come back into the
economy, business then eases up, which leads, overall,
to higher economic growth and development of the Indian
economy. What is interesting to note is that the
Preamble does not, in any manner, refer to liquidation,
which is only availed of as a last resort if there is
either no resolution plan or the resolution plans
submitted are not up to the mark. Even in liquidation,
the liquidator can sell the business of the corporate
debtor as a going concern.
(See ArcelorMittal [ArcelorMittal (India) (P)
Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1] at para 83,
fn 3).

28. It can thus be seen that the primary focus of the
legislation is to ensure revival and continuation of
the corporate debtor by protecting the corporate debtor
from its own management and from a corporate death by
liquidation. The Code is thus a beneficial legislation
which puts the corporate debtor back on its feet, not
being a mere recovery legislation for creditors. The

3 (2019) 4 SCC 17

interests of the corporate debtor have, therefore, been
bifurcated and separated from that of its
promoters/those who are in management. Thus, the
resolution process is not adversarial to the corporate
debtor but, in fact, protective of its interests. The
moratorium imposed by Section 14 is in the interest of
the corporate debtor itself, thereby preserving the
assets of the corporate debtor during the resolution
process. The timelines within which the resolution
process is to take place again protects the corporate
debtor’s assets from further dilution, and also
protects all its creditors and workers by seeing that
the resolution process goes through as fast as possible
so that another management can, through its
entrepreneurial skills, resuscitate the corporate
debtor to achieve all these ends.”

13. This Court further held:

“42. A perusal of the definition of “financial
creditor” and “financial debt” makes it clear that a
financial debt is a debt together with interest, if
any, which is disbursed against the consideration for
time value of money. It may further be money that is
borrowed or raised in any of the manners prescribed in
Section 5(8) or otherwise, as Section 5(8) is an
inclusive definition. On the other hand, an
“operational debt” would include a claim in respect of
the provision of goods or services, including
employment, or a debt in respect of payment of dues
arising under any law and payable to the Government or
any local authority.

43. A financial creditor may trigger the Code either by
itself or jointly with other financial creditors or
such persons as may be notified by the Central
Government when a “default” occurs. The Explanation to
Section 7(1) also makes it clear that the Code may be
triggered by such persons in respect of a default made
to any other financial creditor of the corporate
debtor, making it clear that once triggered, the
resolution process under the Code is a collective
proceeding in rem which seeks, in the first instance,
to rehabilitate the corporate debtor. Under Section
7(4), the adjudicating authority shall, within the
prescribed period, ascertain the existence of a default
on the basis of evidence furnished by the financial
creditor; and under Section 7(5), the adjudicating
authority has to be satisfied that a default has
occurred, when it may, by order, admit the application,
or dismiss the application if such default has not
occurred. On the other hand, under Sections 8 and 9, an
operational creditor may, on the occurrence of a
default, deliver a demand notice which must then be
replied to within the specified period. What is
important is that at this stage, if an application is

filed before the adjudicating authority for initiating
the corporate insolvency resolution process, the
corporate debtor can prove that the debt is disputed.
When the debt is so disputed, such application would be

14. In Pioneer Urban Land and Infrastructure Ltd. Vs. Union

of India4, this Court speaking through Nariman, J. referred to

several earlier judgments including Innoventive Industries

Ltd. (supra) and Swiss Ribbons Pvt. Ltd. (supra) and held that

even individuals who were debenture holders and fixed deposit

holders could also be financial creditors who could initiate

the Corporate Resolution Process.

15. 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.

16. Under Section 6 of the IBC, a right accrues to a

Financial Creditor, an Operational Creditor and the Corporate

Debtor itself to initiate the Corporate Insolvency Resolution

Process in respect of such Corporate Debtor, in the manner

provided in Chapter II of the IBC.

4 (2019) 8 SCC 416

17. Section 7 of the IBC enables a Financial Creditor to file

an application for initiating Corporate Insolvency Resolution

Process against a Corporate Debtor either by itself, or

jointly with other Financial Creditors or any other person on

behalf of the Financial Creditor, as may be notified by the

Central Government, when a default has occurred.

18. 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


19. Corporate Resolution Process gets triggered when a

Corporate Debtor commits a default. A Financial Creditor may

file an application for initiating a Corporate Insolvency

Resolution Process against the Corporate Debtor, when a

default has occurred.

20. A ‘corporate debtor’ means a corporate person who owes a

debt to any person, as per the definition of this expression

in Section 3(8) of the IBC. Section 3(11) defines ‘debt’ to

mean “a liability or obligation in respect of a claim which

is due from any person and includes a financial debt and

operational debt.” The word ‘claim’ has been defined in

Section 3(6) to mean inter alia “a right to payment, whether

or not such right is reduced to judgment, fixed, disputed,

undisputed, legal, equitable, secured or unsecured.”

‘Default’ is defined in section 3(12) to mean “non-payment of

a debt when the whole or any part or instalment of the amount

of debt has become due and payable and is not paid by the

debtor or the Corporate Debtor, as the case may be.” Under

Section 5(7) of the IBC ‘financial creditor’ means any person

to whom a financial debt is owed and includes a person to whom

such debt has legally been assigned.

21. 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.

22. 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.

24. In Dilworth v. Commissioner of Stamps5 the Privy Council,

dealing with a definition which incorporated the word

“include”, said, “The word ‘include’ is very generally used in

interpretation clauses in order to enlarge the meaning; and

when it is so used these words or phrases must be construed as

comprehending, not only such things as they signify according

to their natural import, but also those as things which the

interpretation clause declares that they shall include. But

the word ‘include’ is susceptible 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

expressions defined. It may be equivalent to ‘mean and

include’, and in that case it may afford an exhaustive

5 (1899) AC 99

explanation of the meaning which, for the purposes of the Act,

must invariably be attached to these words or expressions.”

25. In dealing with the definition of ‘industry’ in the

Industrial Disputes Act 1947 in the State of Bombay v.

Hospital Mazdoor Sabha and Ors6, a three-judge Bench of this

Court speaking through Gajendragadkar, J. said “It is obvious

that the words used in an inclusive definition denote

extension and cannot be treated as restricted. Where we are

dealing with an inclusive interpretation, it would be

inappropriate to put a restrictive interpretation upon words

of wider denotation.”

26. In CIT Andhra Pradesh v. Taj Mahal Hotel Secunderabad 7,

this Court, speaking through A.N. Grover, J. construed the

definition of plant in Section 10(5) of the Income Tax Act,

1922, which read “plant” includes vehicles, books, scientific

apparatus and surgical equipment, purchased for the purpose of

the business, profession or vocation and observed:-

“The very fact that even books have been included shows
that the meaning intended to be given to ‘plant’ is
wide. The word ‘includes’ is often used in
interpretation clauses in order to enlarge the meaning
of the words or phrases occurring in the body of the
statute. When it is so used these words and phrases
must be construed as comprehending not only such things
as they signify according to their nature and import
but also those things which the interpretation clause
declares that they shall include.”

6 AIR 1960 SC 610
7 (1971) 3 SCC 550

27. Of course, depending on the context in which the word

‘includes’ may have been used, and the objects and the scheme

of the enactment as a whole, the expression ‘includes’ may

have to be construed as restrictive and exhaustive.

28. In a recent judgment of this Court in Anuj Jain, Interim

Resolution Professional for Jaypee Infratech Ltd. V. Axis

Bank Ltd.8, this 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:-

“46. Applying the aforementioned fundamental principles
to the definition occurring in Section 5(8) of the
Code, we have not an iota of doubt that for a debt to
become “financial debt” for the purpose of Part II of
the Code, the basic elements are that it ought to be a
disbursal against the consideration for time value of
money. It may include any of the methods for raising
money or incurring liability by the modes prescribed in
clauses (a) to (f) of Section 5(8); it may also include
any derivative transaction or counter-indemnity
obligation as per clauses (g) and (h) of Section 5(8);
and it may also be the amount of any liability in
respect of any of the guarantee or indemnity for any of
the items referred to in clauses (a) to (h). The
requirement of existence of a debt, which is disbursed
against the consideration for the time value of money,
in our view, remains an essential part even in respect
of any of the transactions/dealings stated in clauses
(a) to (i) of Section 5(8), even if it is not
necessarily stated therein. In any case, the
definition, by its very frame, cannot be read so
expansive, rather infinitely wide, that the root
requirements of “disbursement” against “the
consideration for the time value of money” could be
forsaken in the manner that any transaction could stand
alone to become a financial debt. In other words, any

8 (2020) 8 SCC 401

of the transactions stated in the said clauses (a) to
(i) of Section 5(8) would be falling within the ambit
of “financial debt” only if it carries the essential
elements stated in the principal clause or at least has
the features which could be traced to such essential
elements in the principal clause. In yet other words,
the essential element of disbursal, and that too
against the consideration for time value of money,
needs to be found in the genesis of any debt before it
may be treated as “financial debt” within the meaning
of Section 5(8) of the Code. This debt may be of any
nature but a part of it is always required to be
carrying, or corresponding to, or at least having some
traces of disbursal against consideration for the time
value of money.

47. As noticed, the root requirement for a creditor to
become financial creditor for the purpose of Part II of
the Code, there must be a financial debt which is owed
to that person. He may be the principal creditor to
whom the financial debt is owed or he may be an
assignee in terms of extended meaning of this
definition but, and nevertheless, the requirement of
existence of a debt being owed is not forsaken.

48. It is also evident that what is being dealt with
and described in Section 5(7) and in Section 5(8) is
the transaction vis-à-vis the corporate debtor.
Therefore, for a person to be designated as a financial
creditor of the corporate debtor, it has to be shown
that the corporate debtor owes a financial debt to such
person. Understood this way, it becomes clear that a
third party to whom the corporate debtor does not owe a
financial debt cannot become its financial creditor for
the purpose of Part II of the Code.

49. Expounding yet further, in our view, the peculiar
elements of these expressions “financial creditor” and
“financial debt”, as occurring in Sections 5(7) and
5(8), when visualised and compared with the generic
expressions “creditor” and “debt” respectively, as
occurring in Sections 3(10) and 3(11) of the Code, the
scheme of things envisaged by the Code becomes clearer.
The generic term “creditor” is defined to mean any
person to whom the debt is owed and then, it has also
been made clear that it includes a “financial
creditor”, a “secured creditor”, an “unsecured
creditor”, an “operational creditor”, and a “decree-
holder”. Similarly, a “debt” means a liability or
obligation in respect of a claim which is due from any
person and this expression has also been given an
extended meaning to include a “financial debt” and an
“operational debt”.

49.1. The use of the expression “means and includes” in
these clauses, on the very same principles of

interpretation as indicated above, makes it clear that
for a person to become a creditor, there has to be a
debt, i.e., a liability or obligation in respect of a
claim which may be due from any person. A “secured
creditor” in terms of Section 3(30) means a creditor in
whose favour a security interest is created; and
“security interest”, in terms of Section 3(31), means a
right, title or interest or claim of property created
in favour of or provided for a secured creditor by a
transaction which secures payment for the purpose of an
obligation and it includes, amongst others, a mortgage.
Thus, any mortgage created in favour of a creditor
leads to a security interest being created and thereby,
the creditor becomes a secured creditor. However, when
all the defining clauses are read together and
harmoniously, it is clear that the legislature has
maintained a distinction amongst the expressions
“financial creditor”, “operational creditor”, “secured
creditor” and “unsecured creditor”. Every secured
creditor would be a creditor; and every financial
creditor would also be a creditor but every secured
creditor may not be a financial creditor. As noticed,
the expressions “financial debt” and “financial
creditor”, having their specific and distinct
connotations and roles in insolvency and liquidation
process of corporate persons, have only been defined in
Part II whereas the expressions “secured creditor” and
“security interest” are defined in Part I.

50. A conjoint reading of the statutory provisions with
the enunciation of this Court in Swiss Ribbons [Swiss
Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17] ,
leaves nothing to doubt that in the scheme of the IBC,
what is intended by the expression “financial creditor”
is a person who has direct engagement in the
functioning of the corporate debtor; who is involved
right from the beginning while assessing the viability
of the corporate debtor; who would engage in
restructuring of the loan as well as in reorganisation
of the corporate debtor’s business when there is
financial stress. In other words, the financial
creditor, by its own direct involvement in a functional
existence of corporate debtor, acquires unique
position, who could be entrusted with the task of
ensuring the sustenance and growth of the corporate
debtor, akin to that of a guardian. In the context of
insolvency resolution process, this class of
stakeholders, namely, financial creditors, is entrusted
by the legislature with such a role that it would look
forward to ensure that the corporate debtor is
rejuvenated and gets back to its wheels with reasonable
capacity of repaying its debts and to attend on its
other obligations. Protection of the rights of all
other stakeholders, including other creditors, would
obviously be concomitant of such resurgence of the
corporate debtor.”

29. In Jaypee Infratech Ltd. (supra), the debts in question

were in the form of third-party security, given by the

Corporate Debtor to secure loans and advances obtained a third

party from the Respondent Lender and, therefore, held not to

be a financial debt within the meaning of Section 5(8) of the

IBC. There was no occasion for this Court to consider the

status of a term loan advanced to meet the working capital

requirements of the Corporate Debtor, which did not carry

interest. Having regard to the Aims, Objects and Scheme of

the IBC, there is no discernible reason, why a term loan to

meet the financial requirements of a Corporate Debtor for its

operation, which obviously has the commercial effect of

borrowing, should be excluded from the purview of a financial


30. In Prabhudas Damodar Kotecha Vs. Manhabala Jeram

Damodar9, this Court interpreting Section 41(1) of the

Presidency Small Cause Courts Act, 1882, as amended by the

Maharashtra Act XIX of 1976, observed that ‘the golden rule is

that the words of a statute must prima facie be given their

ordinary meaning when the language or phraseology employed by

the legislature is precise and plain’. Since Section 41(1)

does not specifically exclude a gratuitous licensee or make a

distinction between a licensee with material consideration or

9 (2013) 15 SCC 358

without material consideration, the expression ‘licensee’ in

Section 41(1) was held to also include a ‘gratuitous


31. At the cost of repetition, it is reiterated that the

trigger for initiation of the Corporate Insolvency Resolution

Process by a Financial Creditor under Section 7 of the IBC is

the occurrence of a default by the Corporate Debtor.

‘Default’ means non-payment of debt in whole or part when the

debt has become due and payable and debt means a liability or

obligation in respect of a claim which is due from any person

and includes financial debt and operational debt. The

definition of ‘debt’ is also expansive and the same includes

inter alia financial debt. The definition of ‘Financial Debt’

in Section 5(8) of IBC does not expressly exclude an interest

free loan. ‘Financial Debt’ would have to be construed to

include interest free loans advanced to finance the business

operations of a corporate body.

32. The appeal is, therefore, allowed. The judgment and

order impugned is, accordingly, set aside. The order of the

Adjudicating Authority, dismissing the petition of the

Appellant under Section 7 of the IBC is also set aside.

The petition under Section 7 stands revived and may be decided

afresh, in accordance with law and in the light of the

findings above.

33. Pending applications, if any, stand disposed of



New Delhi;
July 26, 2021.


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