# M/S ORATOR MARKETING PVT. LTD v. M/S SAMTEX DESINZ PVT. LTD

- **Citation:** [2021] 6 S.C.R. 742
- **Court:** Supreme Court of India
- **Decided:** 2021-07-26
- **Case number:** Civil Appeal No. 2231 of 2021
- **Bench:** Indira Banerjee, V. Ramasubramanian
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/m-s-orator-marketing-pvt-ltd-v-m-s-samtex-desinz-pvt-ltd-34989
- **Pages:** 25

## Headnote

Insolvency and Bankruptcy Code, 2016:
ss. 5(8), 7, 62 - Financial debt - Construction of - Person
giving a term loan to a Corporate Person, free of interest, on account
of its working capital requirements- Non-payment of the same by
Corporate Debtor - Initiation of Corporate Insolvency Resolution
Process-CIRP u/s. 7 by the appellant-lender - Rejection of the
application by NCLT as also NCLAT holding that the claim cannot
be termed to be a 'financial debt' - On appeal, held: Initiation of
CIRP by a Financial Creditor u/s. 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
includes financial debt and operational debt - 'Financial debt' u/s.
5(8) 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 - Definition of 'financial
debt' in s. 5(8) does not expressly exclude an interest free loan -
'Financial Debt' would be construed to include interest free loans
advanced to finance the business operations of a corporate body -
On facts, both NCLAT and NCLT misconstrued the definition of
'financial debt' in s. 5(8), by reading the same in isolation and out
of context, thus, the order passed by the NCLAT and NCLT, set aside
- Application u/s. 7 of the IBC stands revived.
s. 5(8) - Financial debt - Expression 'includes' - Construction
of - Held: Legislature has the power to define a word in a statute -
Where the word is defined to include something, the definition is
prima facie extensive - 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 - Words and phrases.
[2021] 6 S.C.R. 742
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743
Interpretation of statutes: Construction/interpretation of
statutory provision - Held: Legislative intent of the statute is to be
seen in the words used by the legislature itself - In case of doubt,
the object and purpose of the statute or the reason and spirit behind
it, is to be seen - 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.
Allowing the appeal, the Court
HELD: 1.1 Both the NCLAT and NCLT have misconstrued
the definition of 'financial debt' in Section 5(8) of the Insolvency
and Bankruptcy Code, 2016, by reading the same in isolation
and out of context. The judgment and order of the NCLAT,
affirming the judgment and order of the Adjudicating Authority
(NCLT) and dismissing the appeal is patently flawed, and are set
aside. [Para 8, 32][753-G; 766-A]
1.2 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. The interpretative
effort "must be illumined by the goal, though guided by the
words". 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 factors. [Para 9,
10][753-H; 754-A-C]
1.3 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

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SUPREME COURT REPORTS
[2021] 6 S.C.R.
742
M/S ORATOR MARKETING PVT. LTD.
v.
M/S SAMTEX DESINZ PVT. LTD.
(Civil Appeal No. 2231 of 2021)
JULY 26, 2021
[INDIRA BANERJEE AND V. RAMASUBRAMANIAN, JJ.]
Insolvency and Bankruptcy Code, 2016:
ss. 5(8), 7, 62 - Financial debt - Construction of - Person
giving a term loan to a Corporate Person, free of interest, on account
of its working capital requirements- Non-payment of the same by
Corporate Debtor - Initiation of Corporate Insolvency Resolution
Process-CIRP u/s. 7 by the appellant-lender - Rejection of the
application by NCLT as also NCLAT holding that the claim cannot
be termed to be a 'financial debt' - On appeal, held: Initiation of
CIRP by a Financial Creditor u/s. 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
includes financial debt and operational debt - 'Financial debt' u/s.
5(8) 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 - Definition of 'financial
debt' in s. 5(8) does not expressly exclude an interest free loan -
'Financial Debt' would be construed to include interest free loans
advanced to finance the business operations of a corporate body -
On facts, both NCLAT and NCLT misconstrued the definition of
'financial debt' in s. 5(8), by reading the same in isolation and out
of context, thus, the order passed by the NCLAT and NCLT, set aside
- Application u/s. 7 of the IBC stands revived.
s. 5(8) - Financial debt - Expression 'includes' - Construction
of - Held: Legislature has the power to define a word in a statute -
Where the word is defined to include something, the definition is
prima facie extensive - 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 - Words and phrases.
[2021] 6 S.C.R. 742
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Interpretation of statutes: Construction/interpretation of
statutory provision - Held: Legislative intent of the statute is to be
seen in the words used by the legislature itself - In case of doubt,
the object and purpose of the statute or the reason and spirit behind
it, is to be seen - 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.
Allowing the appeal, the Court
HELD: 1.1 Both the NCLAT and NCLT have misconstrued
the definition of 'financial debt' in Section 5(8) of the Insolvency
and Bankruptcy Code, 2016, by reading the same in isolation
and out of context. The judgment and order of the NCLAT,
affirming the judgment and order of the Adjudicating Authority
(NCLT) and dismissing the appeal is patently flawed, and are set
aside. [Para 8, 32][753-G; 766-A]
1.2 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. The interpretative
effort "must be illumined by the goal, though guided by the
words". 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 factors. [Para 9,
10][753-H; 754-A-C]
1.3 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. The eligibility of a person, to initiate
the Corporate Insolvency Resolution Process, if questioned, has
M/S ORATOR MARKETING PVT. LTD. v. M/S SAMTEX DESINZ
PVT. LTD.
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SUPREME COURT REPORTS
[2021] 6 S.C.R.
to be adjudicated upon consideration of the key words and
expressions in the aforesaid Section and other related provisions.
[Para 15, 18][759-B, E]
1.4 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. 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. 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.
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' Section 5(8) includes
the components of sub-clauses (a) to (i) of the said Section.
[Paras 19-21][759-F-G; 760-A-C]
1.5 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.
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. [Paras 22, 23][760-C-E]
1.6 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. [Para 27][761-F]
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1.7 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. [Para
31][765-E-G]
Poppatlal Shah Vs. State of Madras AIR 1953 SC 274
: [1953] SCR 677; Innoventive Industries Ltd. Vs. ICICI
Bank Ltd. (2018) 1 SCC 407 : [2017] 8 SCR 33; Swiss
Ribbons Pvt. Ltd. And Anr. Vs. Union of India and
Others (2019) 4 SCC 17 : [2019] 3 SCR 535; Pioneer
Urban Land and Infrastructure Ltd. Vs. Union of India
(2019) 8 SCC 416 : [2019] 10 SCR 381; Dilworth v.
Commissioner of Stamps (1899) AC 99; State of Bombay
v. Hospital Mazdoor Sabha and Ors. AIR 1960 SC 610
: [1960] 2 SCR 866; CIT Andhra Pradesh v. Taj Mahal
Hotel Secunderabad (1971) 3 SCC 550:[1972] 1 SCR
168; Anuj Jain, Interim Resolution Professional for
Jaypee Infratech Ltd. V. Axis Bank Ltd. (2020) 8 SCC
401 - referred to.
Case Law Reference
[1953] SCR 677
referred to
Para 9
[2017] 8 SCR 33
referred to
Para 11
[2019] 3 SCR 535
referred to
Para 12
[2019] 10 SCR 381
referred to
Para 14
(1899) AC 99
referred to
Para 24
[1960] 2 SCR 866
referred to
Para 25
M/S ORATOR MARKETING PVT. LTD. v. M/S SAMTEX DESINZ
PVT. LTD.
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SUPREME COURT REPORTS
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[1972] 1 SCR 168
referred to
Para 26
(2020) 8 SCC 401
referred to
Para 28
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2231
of 2021.
From the Judgment and Order dated 08.03.2021 of the National
Company Law Appellate Tribunal, New Delhi Bench in Comp. App.
(AT) (INS) No.1064 of 2020.
Nikhil Goel, Lzafeer Ahmad B. F., Advs. for the Appellant.
Aniruddha Deshmukh, Adv. for the Respondent.
The Judgment of the Court was delivered by
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 financial creditor of the
Respondent. The Appellant is an 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
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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
M/S ORATOR MARKETING PVT. LTD. v. M/S SAMTEX DESINZ
PVT. LTD. [INDIRA BANERJEE, J.]
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SUPREME COURT REPORTS
[2021] 6 S.C.R.
has been made against the 'consideration for the time value
of money"
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
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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 theconsideration for the
time value of money and includes-
(a) money borrowed against the payment ofinterest;
(b) any amount raised by acceptance under any acceptance
credit facility or its de-materialised equivalent;
(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 prescribed;
(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 "realestate project"
shall have the meanings respectively assigned to them in
clauses (d) and (zn) of section 2of 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
M/S ORATOR MARKETING PVT. LTD. v. M/S SAMTEX DESINZ
PVT. LTD. [INDIRA BANERJEE, J.]
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transaction, only the market value of such transaction shall
be taken into account;
(h) any counter-indemnity obligation inrespect of a
guarantee, indemnity, bond, documentary letter of credit
or any other instrument issued by a bank or financial
institution;
(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 20206IBC 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 1st 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:-
LOAN AGREEMENT
THE PRESENT LOAN AGREEMENT IS BEING EXECUTED
BETWEEN M/S SAMEER SALES PVT. LTD. AND M/S
SAMTEX DESINZ PVT. LTD. AT NEW DELHI ON THIS
20th DAY JANUARY Two thousand Eighteen.
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BETWEEN
(1) M/S SAMEER SALES PRIVATE LIMITED, a company
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.
AND
(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.
BACKGROUND
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
SAMTEX DESINZ PRIVATE LIMITED
Director
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
M/S ORATOR MARKETING PVT. LTD. v. M/S SAMTEX DESINZ
PVT. LTD. [INDIRA BANERJEE, J.]
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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.
TERMS AND CONDITIONS
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.
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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
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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 factors.
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 nonpayment 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
1 AIR 1953 SC 274
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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 subsection (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 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
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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
Code...................................................................
The moment there is existence of such a dispute, the
operational creditor gets out of the clutches of the Code.
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
future date. It is only when this is proved to the satisfaction of
the adjudicating authority that the adjudicating authority may
reject an application and not otherwise."
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,
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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 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."
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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 rejected."
14. In Pioneer Urban Land and Infrastructure Ltd. Vs. Union
of India4, this Court speaking through Nariman, J. referred to several
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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.
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 provisions.
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
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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.