The Insolvency and Bankruptcy Code, 2016 (hereinafter known as the IBC or Code) has been establishing a knowledge-based approach in the Indian legal system. Moreover, since implication, it has also created a practical approach towards the inter-pretational and applicability of various provisions stipulated under the Code.
In this article, we shall be discussing Section 5(8) of the Code, which stipulates the definition of Financial Debt. The term Financial Debt is an inclusive definition, which means, as stated under the statute,
Section 5(8): financial debt means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes-
(a) money borrowed against the payment of interest;
(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;
(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;
(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 transaction, only the market value of such transaction shall be taken into account;
(h) any counter-indemnity obligation in respect 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;
considering the above inclusive definition reflecting in clear wordings, the explanation of financial debt, stated (a debt along with interest, if any) which may mean be a debt which could be either interest-free or interest-bearing. since various organizations take or borrow money either at the interest rate or at a free rate of interest. Again, the term for the time value of money which again may mean be of an opportunity cost.
That means, if some amount would be given somewhere else, that amount would have been given some consideration (that is something in return). the time value of money here can be better understood considering an opportunity cost.
Moreover, referring to clause (a) to (i) above, the following explanations have been occurring:
(a) means, any amount of money which is or has been or shall be borrowed for the payment of interest.
(b) means, any amount which is or has been or shall be accepted under any acceptance credit facility. Here, the credit facility plays a very important role. It means a credit facility (which could either be in the form of Cash Credit Facility, Working Capital Facility, Term Loan, Unsecured Loans, Commitment Facility or other kinds of acceptable credit facility). Another view of the term any acceptance credit facility which clearly indicates those kinds of credit facilities which normally be offered by Banks and/or Financial Institutions and accepted by the corporates/firms/enterprises. Further, also the term de-materialised equivalent which means in the Demat format.
(c) means, any amount which raised for any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument; hence, the amount raised for the purchase of note (here it may mean be, Commercial Papers (CPs), Corporate Bonds, loans against stock, as may be).
(d) means, any amount or any liability in respect of any lease or hire purchase contract, which has connection or relation towards the capital of the enterprise. It has also been prescribed under the IndAS(Indian Accounting Standards, as provided by the ICAI). The accounting treatment of such lease or hire purchase contract formulated in the Audited Report of the enterprises; which can be understood with the help of analyzing Audit Report.
(e) means, any amount of receivables (also known as debtors receivables) which is sold or discounted (transferred at the discounted rate). the amount of the receivable always reflects in the Audited Report or in Financial Statements with Schedules and Notes.; however, those receivables are not included which are on non-recourse basis (means, generally, a loan made to finance a particular project, with the condition that the project’s profits are the only assets out of which the borrower is legally obliged to repay the loan)
(f) means, in general, any amount which raised, including any forward sale or purchase agreement (which shall arise in future at a specified price at a specified date)
(g) means, derivative transaction (means Futures & Options, mainly used in financial markets), protection against or benefit from fluctuation (means a derivative transaction which includes Call Option/Put Option). That means when the market fluctuates, such options (call/put) helps to cover up the losses and helps to mitigate the risks, and also determines the prices. When the market is rising Call option gives profit and when the market is declining, Put options give profit.
(h) means, counter-indemnity obligation, (such as issuing such instrument which gives some money in-return of that instrument). a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution are kind of instrument which issued by the bank or financial institution and in-return, an enterprise who subscribed it can raise money from the market at mortgaging it.
The above are the conclusive explanation of the term Financial Debt. I appreciate your valuable time reading the Article.
The above are the personal explanations to Section 5(8) of the IBC. For any clarifications or feedback, feel free to share your knowledge with the Author. Your feedback is highly appreciated:
About the Author:
Adv. Saheb Shaikh, (B. Com, GFMP (Int’l Finance), LL.B, DCL(Cyber Law), Advanced certified in Investment Law (NLU-Kolkata), Capital Market (JBIMS), and SEBI Certified Merchant Banking & Research Analyst.
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