Person giving an interest-free loan to the corporate debtor to cover its working capital needs is a financial creditor: SC

Case details: Orator Marketing (P.) Ltd. v. Samtex Desinz (P.) Ltd. - [2021] 128 taxmann.com 424 (SC)

Judiciary and Counsel Details

• • Indira Banerjee and V. Ramasubramanian, JJ.

Facts of the Case

In the instant case the question before the Apex Court was whether a person who gives a term loan to a corporate person, free of interest, on account of its working capital requirements is a financial creditor, and therefore, is competent to initiate Corporate Resolution Process under section 7 of the IBC?

Supreme Court Held

The Apex Court observed that the trigger for initiation of the corporate insolvency resolution process by a financial creditor under section 7 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) 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.