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Supreme Court: Definition of “Financial Debt” under IBC includes Interest-free Loans advanced to finance the business operations of a corporate body

Pratice Area

A Division bench of the Hon’ble Supreme Court of India (SC), comprising of Ms. Justice Indira Banerjee and Mr. Justice V. Ramasubramanian, recently ruled (order dated 26.07.2021) that as the definition of “financial debt” in Section 5(8) of Insolvency and Bankruptcy Code, 2016 (IBC) did not expressly exclude an interest free loan, “financial debt” can be construed to also include interest free loans advanced to finance the business operations of a corporate body. Hence, a creditor which has advanced interest-free loan(s) to finance the business operations of a corporate body is a “financial creditor” in terms of IBC, and competent to initiate corporate insolvency resolution process under Section 7. SC further observed that the definition of “financial debt” cannot be read in isolation without considering some other relevant definitions, particularly the definitions of “claim”, “corporate debtor”, “creditor”, “debt”, “default” and “financial creditor”, and the provisions of Sections 6 and 7 of IBC. The bench, relying on the definition of “financial debt” and having regard to the aims, objects and scheme of IBC, opined that the outstanding principal amount would qualify as a financial debt in case no interest was payable on the loan.

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