In a batch of appeals against orders of the National Company Law Appellate Tribunal the Division Bench of the Hon’ble Supreme Court dealt with the question that, when a debt is considered as financial debt under the Insolvency and Bankruptcy Code, 2016.
A bank had invoked the provisions of Section 7 of the IBC, against the corporate debtor, which provides for initiation of corporate insolvency resolution process (‘CIRP’) against a corporate debtor when there is a default. The National Company Law Tribunal (‘the NCLT’) imposed a moratorium under Section 14 of the IBC and appointed an Interim Resolution Professional (‘IRP’). Initially, the respondent had filed a claim with the IRP as an ‘operational creditor’, which was withdrawn, and a subsequent claim was filed with the IRP as a ‘financial creditor’. However, the IRP rejected the Claim on the ground that respondent could not be considered a ‘financial creditor’. The respondent then moved an application before the NCLT under Section 60(5) of the IBC seeking a direction to the IRP to admit the claim as a ‘financial creditor’. The said application was rejected. Subsequently NCLAT on appeal, held that respondent was a ‘financial creditor’ and not an ‘operational creditor’.
The Hon’ble Supreme Court on appeal noted that the definition of “financial debt” given under section 5 (8) of the incorporates the expression “means and includes”. The first part of the definition starts with the word “means” and provides that there has to be a debt along with interest, if any, which is disbursed against the consideration for the time value of money. The Hon’ble Court further stated that the word “and” appears after the word “money”. Before the words “and includes”, the legislature has not incorporated a comma. After the word “includes”, the legislature has incorporated categories (a) to (i) of financial debts. Hence, the cases covered by categories (a) to (i) must satisfy the test laid down by the earlier part of the sub-section (8).
Considering the above-mentioned principles the Court held that for a debt to become “financial debt”, the basic elements are that it ought to be a disbursal against the consideration for time value of money. The court further reiterated that 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.
Hence, in the light of the facts of the case the Hon’ble Supreme Court confirmed the decision of the NCLAT and held that the amounts covered by security deposits under the agreements constitute financial debt.
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