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. 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 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]
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.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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