M/S ORATOR MARKETING PVT. LTD. versus M/S SAMTEX DESINZ PVT. LTD. on 26 July 2021

SUPREME COURT REPORTS

[2021] 6 S.C.R.

M/S ORATOR MARKETING PVT. LTD.

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M/S SAMTEX DESINZ PVT. LTD.

(Civil Appeal No. 2231 of 2021)

BJULY 26, 2021

[INDIRA BANERJEE AND V. RAMASUBRAMANIAN, JJ.]

Insolvency and Bankruptcy Code, 2016:

ss. 5(8), 7, 62 – Financial debt – Construction of – PersonCgiving a term loan to a Corporate Person, free of interest, on accountof its working capital requirements– Non-payment of the same byCorporate Debtor – Initiation of Corporate Insolvency ResolutionProcess-CIRP u/s. 7 by the appellant-lender – Rejection of theapplication by NCLT as also NCLAT holding that the claim cannotbe termed to be a ‘financial debt’ – On appeal, held: Initiation ofDCIRP by a Financial Creditor u/s. 7 is the occurrence of a defaultby the Corporate Debtor – ‘Default’ means non-payment of debt inwhole or part when the debt has become due and payable, andincludes financial debt and operational debt – ‘Financial debt’ u/s.5(8) means outstanding principal due in respect of a loan and wouldEalso include interest thereon, if any interest were payable thereon –If there is no interest payable on the loan, only the outstandingprincipal would qualify as a financial debt – Definition of ‘financialdebt’ in s. 5(8) does not expressly exclude an interest free loan –‘Financial Debt’ would be construed to include interest free loansadvanced to finance the business operations of a corporate body –FOn facts, both NCLAT and NCLT misconstrued the definition of‘financial debt’ in s. 5(8), by reading the same in isolation and outof 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’ – ConstructionGof – Held: Legislature has the power to define a word in a statute –Where the word is defined to include something, the definition isprima facie extensive – Depending on the context in which the word‘includes’ may have been used, and the objects and the scheme ofthe enactment as a whole, the expression ‘includes’ may have to beHconstrued as restrictive and exhaustive – Words and phrases.

Interpretation of statutes: Construction/interpretation ofstatutory provision – Held: Legislative intent of the statute is to beseen in the words used by the legislature itself – In case of doubt,the object and purpose of the statute or the reason and spirit behindit, is to be seen – When a question arises as to the meaning of acertain provision in a statute, the provision has to be read in itscontext – The Statute has to be read as a whole.

Allowing the appeal, the Court

HELD: 1.1 Both the NCLAT and NCLT have misconstruedthe definition of ‘financial debt’ in Section 5(8) of the Insolvencyand Bankruptcy Code, 2016, by reading the same in isolationand 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 setaside. [Para 8, 32][753-G; 766-A]

1.2 In construing and/or interpreting any statutoryprovision, one must look into the legislative intent of the statute.The intention of the statute has to be found in the words used bythe legislature itself. In case of doubt, it is always safe to lookinto the object and purpose of the statute or the reason and spiritbehind it. Each word, phrase or sentence has to be construed inthe light of the general purpose of the Act itself. The interpretativeeffort “must be illumined by the goal, though guided by thewords”. When a question arises as to the meaning of a certainprovision 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 thelaw, the general scope and ambit of the statute and the mischiefthat 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 theIBC cannot be read in isolation, without considering some otherrelevant definitions, particularly, the definition of ‘claim’ in Section3(6), ‘corporate debtor’ in Section 3(8), ‘creditor’ in Section 3(10),‘debt’ in section 3(11), ‘default’ in Section 3(12), ‘financialcreditor’ in Section 5(7) as also the provisions, inter alia, ofSections 6 and 7 of the IBC. The eligibility of a person, to initiatethe Corporate Insolvency Resolution Process, if questioned, has A

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Ato be adjudicated upon consideration of the key words andexpressions in the aforesaid Section and other related provisions.[Para 15, 18][759-B, E]

1.4 Corporate Resolution Process gets triggered when aCorporate Debtor commits a default. A Financial Creditor mayBfile an application for initiating a Corporate Insolvency ResolutionProcess against the Corporate Debtor, when a default hasoccurred. A ‘corporate debtor’ means a corporate person whoowes a debt to any person, as per the definition of this expressionin Section 3(8) of the IBC. Under Section 5(7) of the IBC ‘financialcreditor’ means any person to whom a financial debt is owed andCincludes a person to whom such debt has legally been assigned.Section 5(8) defines ‘financial debt’ to mean “a debt along withinterest if any which is disbursed against the consideration of thetime value of money and includes money borrowed against thepayment of interest, as per Section 5(8)(a) of the IBC.DThe definition of ‘financial debt’ Section 5(8) includesthe 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 “ifany” which could not have been intended to be otiose. ‘FinancialEdebt’ means outstanding principal due in respect of a loan andwould also include interest thereon, if any interest were payablethereon. If there is no interest payable on the loan, only theoutstanding principal would qualify as a financial debt. BothNCLAT and NCLT have failed to notice clause(f) of Section 5(8),in terms whereof ‘financial debt’ includes any amount raised underFany other transaction, having the commercial effect of borrowing.Furthermore, sub-clauses (a) to (i) of Sub-section 8 of Section 5of the IBC are apparently illustrative and not exhaustive.Legislature has the power to define a word in a statute. Suchdefinition may either be restrictive or be extensive. Where theGword is defined to include something, the definition is prima facieextensive. [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 schemeof the enactment as a whole, the expression ‘includes’ may haveHto be construed as restrictive and exhaustive. [Para 27][761-F]

1.7 The trigger for initiation of the Corporate InsolvencyResolution Process by a Financial Creditor under Section 7 ofthe IBC is the occurrence of a default by the Corporate Debtor.‘Default’ means non-payment of debt in whole or part when thedebt has become due and payable and debt means a liability orobligation in respect of a claim which is due from any person andincludes 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 notexpressly exclude an interest free loan. ‘Financial Debt’ wouldhave to be construed to include interest free loans advanced tofinance the business operations of a corporate body. [Para31][765-E-G]

Poppatlal Shah Vs. State of Madras AIR 1953 SC 274: [1953] SCR 677; Innoventive Industries Ltd. Vs. ICICIBank Ltd. (2018) 1 SCC 407 : [2017] 8 SCR 33; SwissRibbons Pvt. Ltd. And Anr. Vs. Union of India andOthers (2019) 4 SCC 17 : [2019] 3 SCR 535; PioneerUrban 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 Bombayv. Hospital Mazdoor Sabha and Ors. AIR 1960 SC 610: [1960] 2 SCR 866; CIT Andhra Pradesh v. Taj MahalHotel Secunderabad (1971) 3 SCC 550:[1972] 1 SCR168; Anuj Jain, Interim Resolution Professional forJaypee Infratech Ltd. V. Axis Bank Ltd. (2020) 8 SCC401 – referred to.

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A[1972] 1 SCR 168referred toPara 26(2020) 8 SCC 401referred toPara 28

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2231of 2021.

BFrom the Judgment and Order dated 08.03.2021 of the NationalCompany 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.CThe Judgment of the Court was delivered by INDIRA BANERJEE, J.

This appeal under Section 62 of the Insolvency and BankruptcyCode, 2016 (hereinafter referred to as the IBC) is against the finalDjudgment 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 pleasedto dismiss the appeal of the Appellant and confirmed the order dated23.10.2020 of the Adjudicating Authority, i.e., the National CompanyLaw Tribunal (NCLT), New Delhi, dismissing the petition being CP(IB)ENo. 908/ND/2020, filed by the Appellant under Section 7 of the IBCwith the finding that the Appellant is not a financial creditor of theRespondent. The Appellant is an assignee of the debt in question.

2. The short question involved in this Appeal is, whether a personwho gives a term loan to a Corporate Person, free of interest, on accountFof its working capital requirements is not a Financial Creditor, andtherefore, incompetent to initiate the Corporate Resolution Process underSection 7 of the IBC.

3. M/s Sameer Sales Private Limited, hereinafter referred to asto “Original Lender”, advanced a term loan of Rs.1.60 crores to theGCorporate Debtor for a period of two years, to enable the CorporateDebtor to meet its working capital requirement. The Original Lenderhas assigned the outstanding loan to the Appellant.

4. According to the Appellant the loan was due to be repaid by theCorporate Debtor in full within 01.02.2020. The Appellant claims thatH

the Corporate Debtor made some payments, but Rs.1.56 crores stillremain outstanding.

5. The Appellant filed a Petition under Section 7 of the IBC in theNCLT for initiation of the Corporate Resolution Process. The petitionwas, however, rejected by a judgment and order dated 23.10.2020. TheAdjudicating Authority (NCLT) held :

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

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

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15. Mere grant of loan and admission of taking loan willipso fact not treat the applicant as ‘Financial Creditor’ withinthe meaning of Section 5(8) of the Code.

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

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20. It is well settled that the onus lies on the applicant toestablish that the loan was given against the considerationfor time value of money. Onus to prove also lies on theapplicant to establish that the debt claimed in the applicationcomes within the purview of ‘financial debt’ and that theapplicant is a financial creditor’ in respect of the present claimin question. Applicant has miserably failed to substantiatewith supporting documentary evidence that interest, asclaimed at Part-V of the application, is payable as per theagreed 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’ asdefined under sub-section (8) of Section 5 the Claimant isrequired to show that (I) there is a debt along with interest, ifany, which has been disbursed and (ii) such disbursement A

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Ahas been made against the ‘consideration for the time valueof money”

22. It is reiterated that in the present case neither the loanagreement has any provision regarding the payment of interestnot there is any supporting evidence/document to establishBapplicable rate of interest to be paid on the said loan. Theapplicant has failed to prove that the loan was disbursedagainst consideration for time value of money, particularlywhen respondent company has affirmed that no interest hasbeen paid not payable at any point of time.

C23. Similarly, in the matter of Shreyans Realtors Private Limited& Anr. vs. Saroj Realtors & Developers Private LimitedCompany Appeal (AT) (Insolvency) No.311 of 2018, vide itsorder dated 04.07.2018 Hon’ble NCLAT has observed thatwhen corporate debtor never accepted the component ofinterest and has given no undertaking to repay the loan withDinterest; the Appellants cannot claim to ow ‘financial debt’from the ‘Corporate Debtor’ and thereby cannot be claimedto 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 aE‘financial debt’ nor does the applicant come within themeaning of ‘financial creditor’. Once the applicant does notcome within the meaning of ‘financial creditor’ he becomesineligible to file the application under Section 7 of theInsolvency Code 2016.

F25. for the reasons stated above this petition fails and thesame stands dismissed as not maintainable.”

6. Being aggrieved, the Appellant filed an appeal under Section61 of the IBC. The appeal has been dismissed by the NCLAT, by thejudgment and order impugned before this Court.

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7. The relevant part of the impugned judgment and order isextracted hereinbelow for convenience:

“5. We have heard Counsel for both sides and perused theAppeal and the Reply filed by the Respondent. The fact thatloan was advanced to the Respondent, is not in dispute. The H

narrow question involved is whether the transactionconcerned can be treated as a transaction of Financial Debtas defined in Section 5(8) of IBC. The definition of “FinancialDebt” under IBC Section 5(8) reads as under:- “(8) “financial debt” means a debt alongwith interest, ifany, which is disbursed against theconsideration for thetime value of money and includes—

(a) money borrowed against the payment ofinterest; (b) any amount raised by acceptance under any acceptancecredit facility or its de-materialised equivalent;

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

(d) the amount of any liability in respect of any lease orhire purchase contract which is deemed as a finance orcapital lease under the Indian Accounting Standards orsuch other accounting standards as may be prescribed; (e) receivables sold or discounted other than anyreceivables sold on non-recourse basis; (f) any amount raised under any other transaction,including any forward sale or purchase agreement, havingthe commercial effect of a borrowing; Explanation.—For the purposes of this sub-clause,—

(i) any amount raised from an allottee under a real estateproject shall be deemed to be an amount having thecommercial effect of a borrowing;and

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

(g) any derivative transaction entered into in connectionwith protection against or benefit from fluctuation in anyrate or price and for calculating the value of any derivative A

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transaction, only the market value of such transaction shallbe taken into account; (h) any counter-indemnity obligation inrespect of aguarantee, indemnity, bond, documentary letter of creditor any other instrument issued by a bank or financialinstitution;

(i) the amount of any liability in respect of any of theguarantee or indemnity for any of the items referred to insub-clauses (a) to (h) of this clause;”Company Appeal (AT)(Ins) No.1064 of 20206IBC separately defines debt underSection 3(11) as under:- “(11) “debt” means a liability or obligation in respect of aclaim which is due from any person and includes a financialdebt and operational debt;”

It is apparent that there can be debts which do not necessarilyfall in the definition of financial debt or operational. Moneyborrowed against payment of interest comes within thedefinition financial debt. However, if the money borrowed isnot against payment of interest, under the definition offinancial debt, the core requirement is to find whether there is“consideration for the time value of money”. The facts of thematter disclose and the Appeal also records that when theCorporate Debtor was unable to get any further loan fromthe market after having taken loan from M/s. Tata CapitalFinancial Services Ltd., M/s. Sameer Sales which was relatedparty to the Corporate Debtor, extended interest free unsecuredloan to the Corporate Debtor payable on or after 1[st] February,2020 and that too upon demand by the lenders. It would beappropriate to reproduce the Loan Agreement itself tounderstand the same. The Loan Agreement (Annexure A-2)reads as under:- LOAN AGREEMENT

THE PRESENT LOAN AGREEMENT IS BEING EXECUTEDBETWEEN M/S SAMEER SALES PVT. LTD. AND M/SSAMTEX DESINZ PVT. LTD. AT NEW DELHI ON THIS

20[th] DAY JANUARY Two thousand Eighteen.

BETWEEN

(1) M/S SAMEER SALES PRIVATE LIMITED, a companyregistered under the Companies Act, 1956 bearing CINNo. U51900DL1992PTC047363, having registered officeat 122, Tribunal Complex, Ishwar Nagar, Mathura Road,New Delhi-110065, represented by its director, KamleshRani Bhardwaj hereinafter referred to the “Lender”whichexpression shall mean and include is nominees, assigns orsuccessors, from time to time.

AND

(2) M/S Samtex Desinz Private Limited, a companyregistered under the Companies Act, 1956 bearing CINNo. U18209DL2017PTC320315, having registered officeat A-36, Hoisery Complex Phase 2 NOIDA U.P. representedby its director Mr. Sumeer Duggal, hereinafter referred tothe “Borrower” which expression shall mean and includeits 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 (ProprietorshipFirm) the Borrower had availed of a term loan of Rs.14,00,00,000.00 (Fourteen Crore Only) form M/S TataCapital Financial Services Ltd., vide which all the assetsof the Borrower have been mortgaged/assigned in favourof the aforesaid institutional lender. That the aforesaidterms facility is insufficient to cover certain working capitalrequirement of the Borrower and is insufficient to meetother 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 of2,00,00,000.00 (Two Crore Only)

2. That because of the aforesaid loan from the M/s TataCapital no other institutions. Willing to extend unsecured A

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loan to the Borrower, and therefore it is agreed that thelender 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 termloan Rs. 1,60,00,000.00 (One Crore Sixty Lakh Only) fora period of two years commencing form the date of signingof this agreement.

2. The aforesaid amount shall become due and payable01-02-2020 or upon demand by the lender.

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

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

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

6. The Borrower agrees that so long as the loan as inoutstanding the Borrower will inform the Lender in anychange in the constitution of the Borrower.

7. The Borrower shall repay the entire loan on or before04/02/2020 and that till such a time the entire amount isnot repaid the terms of the present agreement shall remainin force. The Borrower is entitled to pre-pay the loanamount at any time, without any penalty, after giving thelender notice in writing of its intention of the same.

8. The agreement shall remain in force of the term indicatedin Clause 7 above unless terminated earlier in accordancewith Clause 7.

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

10. The agreement shall be governed by Indian Law andthe Courts of Delhi shall have jurisdiction to settle anydispute arising out of or in connection with this agreement.

For the Borrower

SamtexDesinzPvt LtdFor the LenderDirectorDirector Witness:

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

Appeal para-7(d) as under :-

“d. In these circumstances to ensure continued developmentof the business of the Corporate Debtor, Mr. SameerBharadwaj, the then Director and the Current AuthorizedSignatory of the Respondent, through the sister concernadvanced a sun of Rs. 1.60 Crore. It is submitted that incompliance with the law, the aforesaid sum was extendedunder a loan agreement, however the sum was advancedinterest 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 judgmentand order of the Adjudicating Authority (NCLT) and dismissing the appealis patently flawed. Both the NCLAT and NCLT have misconstrued thedefinition of ‘financial debt’ in Section 5(8) of the IBC, by reading thesame in isolation and out of context.

9. In construing and/or interpreting any statutory provision, onemust look into the legislative intent of the statute. The intention of the

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Astatute has to be found in the words used by the legislature itself. In caseof doubt, it is always safe to look into the object and purpose of thestatute or the reason and spirit behind it. Each word, phrase or sentencehas 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 Madras[1],and a plethora of other judgments of this Court. To quote Krishna Iyer, J,Bthe interpretative effort “must be illumined by the goal, though guided bythe words”.

10. When a question arises as to the meaning of a certain provisionin a statute, the provision has to be read in its context. The statute has tobe read as a whole. The previous state of the law, the general scope andCambit of the statute and the mischief that it was intended to remedy arerelevant factors.

11. In Innoventive Industries Ltd. Vs. ICICI Bank Ltd.[2],authored by Nariman, J., this Court analysed the scheme of the IBC andheld:

D“27. The scheme of the Code is to ensure that when a defaulttakes place, in the sense that a debt becomes due and is notpaid, the insolvency resolution process begins. Default isdefined in Section 3(12) in very wide terms as meaning non-payment of a debt once it becomes due and payable, whichincludes non-payment of even part thereof or an instalmentEamount. For the meaning of “debt”, we have to go to Section3(11), which in turn tells us that a debt means a liability ofobligation 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. TheFCode gets triggered the moment default is of rupees one lakhor more (Section 4). The corporate insolvency resolutionprocess may be triggered by the corporate debtor itself or afinancial creditor or operational creditor. A distinction is madeby the Code between debts owed to financial creditors andoperational creditors. A financial creditor has been definedGunder Section 5(7) as a person to whom a financial debt isowed and a financial debt is defined in Section 5(8) to meana debt which is disbursed against consideration for the timevalue of money. As opposed to this, an operational creditor 1 AIR 1953 SC 274H2 (2018) 1 SCC 407

means a person to whom an operational debt is owed and anoperational debt under Section 5(21) means a claim in respectof provision of goods or services.

28. When it comes to a financial creditor triggering theprocess, Section 7 becomes relevant. Under the Explanationto Section 7(1), a default is in respect of a financial debtowed to any financial creditor of the corporate debtor — itneed 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, whichtakes us to the Insolvency and Bankruptcy (Application toAdjudicating Authority) Rules, 2016. Under Rule 4, theapplication is made by a financial creditor in Form 1accompanied by documents and records required therein. Form1 is a detailed form in 5 parts, which requires particulars ofthe applicant in Part I, particulars of the corporate debtor inPart II, particulars of the proposed interim resolutionprofessional in Part III, particulars of the financial debt inPart IV and documents, records and evidence of default inPart V. Under Rule 4(3), the applicant is to dispatch a copyof the application filed with the adjudicating authority byregistered post or speed post to the registered office of thecorporate debtor. The speed, within which the adjudicatingauthority is to ascertain the existence of a default from therecords of the information utility or on the basis of evidencefurnished by the financial creditor, is important. This it mustdo within 14 days of the receipt of the application. It is at thestage of Section 7(5), where the adjudicating authority is tobe satisfied that a default has occurred, that the corporatedebtor is entitled to point out that a default has not occurredin the sense that the “debt”, which may also include a disputedclaim, is not due. A debt may not be due if it is not payable inlaw or in fact. The moment the adjudicating authority issatisfied that a default has occurred, the application must beadmitted unless it is incomplete, in which case it may givenotice to the applicant to rectify the defect within 7 days ofreceipt of a notice from the adjudicating authority. Undersub-section (7), the adjudicating authority shall thencommunicate the order passed to the financial creditor and AB

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Acorporate debtor within 7 days of admission or rejection ofsuch application, as the case may be.

29. The scheme of Section 7 stands in contrast with the schemeunder Section 8 where an operational creditor is, on theoccurrence of a default, to first deliver a demand notice ofBthe unpaid debt to the operational debtor in the mannerprovided in Section 8(1) of theCode.……………………..........................................

The moment there is existence of such a dispute, theoperational creditor gets out of the clutches of the Code.

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30. On the other hand, as we have seen, in the case of acorporate debtor who commits a default of a financial debt,the adjudicating authority has merely to see the records ofthe information utility or other evidence produced by thefinancial creditor to satisfy itself that a default has occurred.DIt is of no matter that the debt is disputed so long as the debtis “due” i.e. payable unless interdicted by some law or hasnot yet become due in the sense that it is payable at somefuture date. It is only when this is proved to the satisfaction ofthe adjudicating authority that the adjudicating authority mayreject an application and not otherwise.”E12. In Swiss Ribbons Pvt. Ltd. And Anr. Vs. Union of India andOthers[3], this Court speaking through Nariman, J. held:

“27. As is discernible, the Preamble gives an insight into whatis sought to be achieved by the Code. The Code is first andFforemost, a Code for reorganisation and insolvency resolutionof corporate debtors. Unless such reorganisation is effectedin a time-bound manner, the value of the assets of such personswill deplete. Therefore, maximisation of value of the assets ofsuch persons so that they are efficiently run as going concernsis another very important objective of the Code. This, in turn,Gwill promote entrepreneurship as the persons in managementof the corporate debtor are removed and replaced byentrepreneurs. When, therefore, a resolution plan takes offand the corporate debtor is brought back into the economicmainstream, it is able to repay its debts, which, in turn, enhances the viability of credit in the hands of banks andfinancial institutions. Above all, ultimately, the interests of allstakeholders are looked after as the corporate debtor itselfbecomes a beneficiary of the resolution scheme—workers arepaid, the creditors in the long run will be repaid in full, andshareholders/investors are able to maximise their investment.Timely resolution of a corporate debtor who is in the red, byan effective legal framework, would go a long way to supportthe development of credit markets. Since more investment canbe made with funds that have come back into the economy,business then eases up, which leads, overall, to highereconomic growth and development of the Indian economy.What is interesting to note is that the Preamble does not, inany manner, refer to liquidation, which is only availed of as alast resort if there is either no resolution plan or the resolutionplans submitted are not up to the mark. Even in liquidation,the liquidator can sell the business of the corporate debtoras 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 legislationis to ensure revival and continuation of the corporate debtorby protecting the corporate debtor from its own managementand from a corporate death by liquidation. The Code is thusa beneficial legislation which puts the corporate debtor backon its feet, not being a mere recovery legislation for creditors.The interests of the corporate debtor have, therefore, beenbifurcated and separated from that of its promoters/those whoare in management. Thus, the resolution process is notadversarial to the corporate debtor but, in fact, protective ofits interests. The moratorium imposed by Section 14 is in theinterest of the corporate debtor itself, thereby preserving theassets of the corporate debtor during the resolution process.The timelines within which the resolution process is to takeplace again protects the corporate debtor’s assets from furtherdilution, and also protects all its creditors and workers byseeing that the resolution process goes through as fast aspossible so that another management can, through itsentrepreneurial skills, resuscitate the corporate debtor toachieve all these ends.”

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13. This Court further held:

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“42. A perusal of the definition of “financial creditor” and“financial debt” makes it clear that a financial debt is a debttogether with interest, if any, which is disbursed against theconsideration for time value of money. It may further be moneyBthat is borrowed or raised in any of the manners prescribedin Section 5(8) or otherwise, as Section 5(8) is an inclusivedefinition. On the other hand, an “operational debt” wouldinclude a claim in respect of the provision of goods or services,including employment, or a debt in respect of payment of duesarising under any law and payable to the Government or anyClocal authority.

43. A financial creditor may trigger the Code either by itselfor jointly with other financial creditors or such persons asmay be notified by the Central Government when a “default”occurs. The Explanation to Section 7(1) also makes it clearDthat the Code may be triggered by such persons in respect ofa default made to any other financial creditor of the corporatedebtor, making it clear that once triggered, the resolutionprocess under the Code is a collective proceeding in remwhich seeks, in the first instance, to rehabilitate the corporatedebtor. Under Section 7(4), the adjudicating authority shall,Ewithin the prescribed period, ascertain the existence of adefault on the basis of evidence furnished by the financialcreditor; and under Section 7(5), the adjudicating authorityhas to be satisfied that a default has occurred, when it may,by order, admit the application, or dismiss the application ifsuch default has not occurred. On the other hand, underFSections 8 and 9, an operational creditor may, on theoccurrence of a default, deliver a demand notice which mustthen be replied to within the specified period. What isimportant is that at this stage, if an application is filed beforethe adjudicating authority for initiating the corporateGinsolvency resolution process, the corporate debtor can provethat the debt is disputed. When the debt is so disputed, suchapplication would be rejected.”

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14. In Pioneer Urban Land and Infrastructure Ltd. Vs. Unionof India[4], this Court speaking through Nariman, J. referred to several H4 (2019) 8 SCC 416

earlier judgments including Innoventive Industries Ltd. (supra) andSwiss Ribbons Pvt. Ltd. (supra) and held that even individuals whowere debenture holders and fixed deposit holders could also be financialcreditors who could initiate the Corporate Resolution Process.

15. The definition of ‘financial debt’ in Section 5(8) of the IBCcannot be read in isolation, without considering some other relevantdefinitions, particularly, the definition of ‘claim’ in Section 3(6), ‘corporatedebtor’ 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 theprovisions, inter alia, of Sections 6 and 7 of the IBC.

16. Under Section 6 of the IBC, a right accrues to a FinancialCreditor, an Operational Creditor and the Corporate Debtor itself to initiatethe Corporate Insolvency Resolution Process in respect of such CorporateDebtor, in the manner provided in Chapter II of the IBC.

17. Section 7 of the IBC enables a Financial Creditor to file anapplication for initiating Corporate Insolvency Resolution Process againsta Corporate Debtor either by itself, or jointly with other Financial Creditorsor any other person on behalf of the Financial Creditor, as may be notifiedby the Central Government, when a default has occurred.

18. The eligibility of a person, to initiate the Corporate InsolvencyResolution Process, if questioned, has to be adjudicated upon considerationof the key words and expressions in the aforesaid Section and otherrelated provisions.

19. Corporate Resolution Process gets triggered when a CorporateDebtor commits a default. A Financial Creditor may file an applicationfor initiating a Corporate Insolvency Resolution Process against theCorporate Debtor, when a default has occurred.

20. A ‘corporate debtor’ means a corporate person who owes adebt 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 obligationin respect of a claim which is due from any person and includes afinancial debt and operational debt.” The word ‘claim’ has beendefined in Section 3(6) to mean inter alia “a right to payment, whetheror not such right is reduced to judgment, fixed, disputed, undisputed,legal, equitable, secured or unsecured.” ‘Default’ is defined in section3(12) to mean “non-payment of a debt when the whole or any partor instalment of the amount of debt has become due and payable A

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Aand is not paid by the debtor or the Corporate Debtor, as the casemay be.” Under Section 5(7) of the IBC ‘financial creditor’ means anyperson to whom a financial debt is owed and includes a person to whomsuch debt has legally been assigned.

21. The definition of ‘financial debt’ in Section 5(8) of the IBCBhas been quoted above. Section 5(8) defines ‘financial debt’ to mean “adebt along with interest if anywhich is disbursed against theconsideration of the time value of money and includes moneyborrowed against the payment of interest, as per Section 5(8) (a) ofthe IBC. The definition of ‘financial debt’ in Section 5(8) includes thecomponents of sub-clauses (a) to (i) of the said Section.C22. The NCLT and NCLAT have overlooked the words “if any”which could not have been intended to be otiose. ‘Financial debt’ meansoutstanding principal due in respect of a loan and would also includeinterest thereon, if any interest were payable thereon. If there is nointerest payable on the loan, only the outstanding principal would qualifyDas a financial debt. Both NCLAT and NCLT have failed to noticeclause(f) of Section 5(8), in terms whereof ‘financial debt’ includes anyamount raised under any other transaction, having the commercial effectof borrowing.

23. Furthermore, sub-clauses (a) to (i) of Sub-section 8 of SectionE5 of the IBC are apparently illustrative and not exhaustive. Legislaturehas the power to define a word in a statute. Such definition may eitherbe restrictive or be extensive. Where the word is defined to includesomething, the definition is prima facie extensive.

24. In Dilworth v. Commissioner of Stamps[5] the Privy Council,Fdealing with a definition which incorporated the word “include”, said,“The word ‘include’ is very generally used in interpretation clauses inorder to enlarge the meaning; and when it is so used these words orphrases must be construed as comprehending, not only such things asthey signify according to their natural import, but also those as thingsGwhich the interpretation clause declares that they shall include. But theword ‘include’ is susceptible of another construction, which may becomeimperative, if the context of the Act is sufficient to show that it was notmerely employed for the purpose of adding to the natural significance ofthe words or expressions defined. It may be equivalent to ‘mean and include’, and in that case it may afford an exhaustive explanation of themeaning which, for the purposes of the Act, must invariably be attachedto these words or expressions.”

25. In dealing with the definition of ‘industry’ in the IndustrialDisputes Act 1947 in the State of Bombay v. Hospital Mazdoor Sabhaand Ors[6], a three-judge Bench of this Court speaking throughGajendragadkar, J. said “It is obvious that the words used in aninclusive definition denote extension and cannot be treated asrestricted. Where we are dealing with an inclusive interpretation, itwould be inappropriate to put a restrictive interpretation upon wordsof wider denotation.”

26. In CIT Andhra Pradesh v. Taj Mahal Hotel Secunderabad[7],this Court, speaking through A.N. Grover, J. construed the definition ofplant 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 andobserved:- “The very fact that even books have been included showsthat the meaning intended to be given to ‘plant’ is wide. Theword ‘includes’ is often used in interpretation clauses in orderto enlarge the meaning of the words or phrases occurring inthe body of the statute. When it is so used these words andphrases must be construed as comprehending not only suchthings as they signify according to their nature and importbut also those things which the interpretation clause declaresthat they shall include.”

27. Of course, depending on the context in which the word‘includes’ may have been used, and the objects and the scheme of theenactment as a whole, the expression ‘includes’ may have to be construedas restrictive and exhaustive.

28. In a recent judgment of this Court in Anuj Jain, InterimResolution Professional for Jaypee Infratech Ltd. V. Axis Bank Ltd.[8],this court, speaking through Maheswari, J. referred to various precedentson restrictive and expansive interpretation of words and phrases used ina statute, particularly, the words ‘means’ and ‘includes’ and held:- 6 AIR 1960 SC 610

7 (1971) 3 SCC 550

8 (2020) 8 SCC 401

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A“46. Applying the aforementioned fundamental principles tothe definition occurring in Section 5(8) of the Code, we havenot an iota of doubt that for a debt to become “financialdebt” for the purpose of Part II of the Code, the basic elementsare that it ought to be a disbursal against the considerationfor time value of money. It may include any of the methodsBfor raising money or incurring liability by the modesprescribed in clauses (a) to (f) of Section 5(8); it may alsoinclude any derivative transaction or counter-indemnityobligation as per clauses (g) and (h) of Section 5(8); and itmay also be the amount of any liability in respect of any ofCthe guarantee or indemnity for any of the items referred to inclauses (a) to (h). The requirement of existence of a debt,which is disbursed against the consideration for the time valueof money, in our view, remains an essential part even in respectof any of the transactions/dealings stated in clauses (a) to (i)of Section 5(8), even if it is not necessarily stated therein. InDany case, the definition, by its very frame, cannot be read soexpansive, rather infinitely wide, that the root requirementsof “disbursement” against “the consideration for the timevalue of money” could be forsaken in the manner that anytransaction could stand alone to become a financial debt. InEother words, any 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 statedin the principal clause or at least has the features which couldbe traced to such essential elements in the principal clause.In yet other words, the essential element of disbursal, andFthat too against the consideration for time value of money,needs to be found in the genesis of any debt before it may betreated 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 isalways required to be carrying, or corresponding to, or atGleast having some traces of disbursal against considerationfor the time value of money.

47. As noticed, the root requirement for a creditor to becomefinancial creditor for the purpose of Part II of the Code, theremust be a financial debt which is owed to that person. Hemay be the principal creditor to whom the financial debt is H

owed or he may be an assignee in terms of extended meaningof this definition but, and nevertheless, the requirement ofexistence of a debt being owed is not forsaken.

48. It is also evident that what is being dealt with anddescribed in Section 5(7) and in Section 5(8) is the transactionvis-à-vis the corporate debtor. Therefore, for a person to bedesignated as a financial creditor of the corporate debtor, ithas to be shown that the corporate debtor owes a financialdebt to such person. Understood this way, it becomes clearthat a third party to whom the corporate debtor does not owea financial debt cannot become its financial creditor for thepurpose of Part II of the Code.

49. Expounding yet further, in our view, the peculiar elementsof these expressions “financial creditor” and “financial debt”,as occurring in Sections 5(7) and 5(8), when visualised andcompared with the generic expressions “creditor” and “debt”respectively, as occurring in Sections 3(10) and 3(11) of theCode, the scheme of things envisaged by the Code becomesclearer. The generic term “creditor” is defined to mean anyperson to whom the debt is owed and then, it has also beenmade clear that it includes a “financial creditor”, a “securedcreditor”, an “unsecured creditor”, an “operational creditor”,and a “decree-holder”. Similarly, a “debt” means a liabilityor obligation in respect of a claim which is due from anyperson and this expression has also been given an extendedmeaning to include a “financial debt” and an “operationaldebt”.

49.1. The use of the expression “means and includes” in theseclauses, on the very same principles of interpretation asindicated above, makes it clear that for a person to become acreditor, there has to be a debt, i.e., a liability or obligation inrespect of a claim which may be due from any person. A“secured creditor” in terms of Section 3(30) means a creditorin whose favour a security interest is created; and “securityinterest”, in terms of Section 3(31), means a right, title orinterest or claim of property created in favour of or providedfor a secured creditor by a transaction which secures paymentfor the purpose of an obligation and it includes, amongst ABC

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others, a mortgage. Thus, any mortgage created in favour ofa creditor leads to a security interest being created andthereby, the creditor becomes a secured creditor. However,when all the defining clauses are read together andharmoniously, it is clear that the legislature has maintained adistinction amongst the expressions “financial creditor”,“operational creditor”, “secured creditor” and “unsecuredcreditor”. Every secured creditor would be a creditor; andevery financial creditor would also be a creditor but everysecured creditor may not be a financial creditor. As noticed,the expressions “financial debt” and “financial creditor”,having their specific and distinct connotations and roles ininsolvency and liquidation process of corporate persons, haveonly been defined in Part II whereas the expressions “securedcreditor” and “security interest” are defined in Part I.

50. A conjoint reading of the statutory provisions with theenunciation of this Court in Swiss Ribbons [Swiss Ribbons(P) Ltd. v. Union of India, (2019) 4 SCC 17] , leaves nothingto doubt that in the scheme of the IBC, what is intended bythe expression “financial creditor” is a person who has directengagement in the functioning of the corporate debtor; whois involved right from the beginning while assessing theviability of the corporate debtor; who would engage inrestructuring of the loan as well as in reorganisation of thecorporate debtor’s business when there is financial stress. Inother words, the financial creditor, by its own directinvolvement in a functional existence of corporate debtor,acquires unique position, who could be entrusted with thetask of ensuring the sustenance and growth of the corporatedebtor, akin to that of a guardian. In the context of insolvencyresolution process, this class of stakeholders, namely, financialcreditors, is entrusted by the legislature with such a role thatit would look forward to ensure that the corporate debtor isrejuvenated and gets back to its wheels with reasonablecapacity of repaying its debts and to attend on its otherobligations. Protection of the rights of all other stakeholders,including other creditors, would obviously be concomitant ofsuch resurgence of the corporate debtor.”

29. In Jaypee Infratech Ltd. (supra), the debts in question werein the form of third-party security, given by the Corporate Debtor tosecure loans and advances obtained a third party from the RespondentLender and, therefore, held not to be a financial debt within the meaningof Section 5(8) of the IBC. There was no occasion for this Court toconsider the status of a term loan advanced to meet the working capitalrequirements of the Corporate Debtor, which did not carry interest.Having regard to the Aims, Objects and Scheme of the IBC, there is nodiscernible reason, why a term loan to meet the financial requirementsof a Corporate Debtor for its operation, which obviously has thecommercial effect of borrowing, should be excluded from the purviewof a financial debt.

30. In Prabhudas Damodar Kotecha Vs. Manhabala JeramDamodar[9], this Court interpreting Section 41(1) of the Presidency SmallCause Courts Act, 1882, as amended by the Maharashtra Act XIX of1976, observed that ‘the golden rule is that the words of a statute mustprima facie be given their ordinary meaning when the language orphraseology employed by the legislature is precise and plain’. SinceSection 41(1) does not specifically exclude a gratuitous licensee or makea distinction between a licensee with material consideration or withoutmaterial consideration, the expression ‘licensee’ in Section 41(1) washeld to also include a ‘gratuitous licensee’.

31. At the cost of repetition, it is reiterated that the trigger forinitiation of the Corporate Insolvency Resolution Process by a FinancialCreditor under Section 7 of the IBC is the occurrence of a default by theCorporate Debtor. ‘Default’ means non-payment of debt in whole orpart when the debt has become due and payable and debt means aliability or obligation in respect of a claim which is due from any personand includes financial debt and operational debt. The definition of ‘debt’is also expansive and the same includes inter alia financial debt. Thedefinition of ‘Financial Debt’ in Section 5(8) of IBC does not expresslyexclude an interest free loan. ‘Financial Debt’ would have to be construedto include interest free loans advanced to finance the business operationsof a corporate body.

32. The appeal is, therefore, allowed. The judgment and orderimpugned is, accordingly, set aside. The order of the Adjudicating AB

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AAuthority, dismissing the petition of the Appellant under Section 7 of theIBC is also set aside. The petition under Section 7 stands revived andmay be decided afresh, in accordance with law and in the light of thefindings above.

33. Pending applications, if any, stand disposed of accordingly.

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Nidhi Jain

Appeal allowed.

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