There are two types of creditors under the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the Code)– Financial Creditor and Operational Creditor. The relevance of this differentiation is that the Financial Creditors form a part of the Committee of Creditors (hereinafter referred to as the ‘CoC’). The CoC finally approves the Resolution Plan. A Financial Creditor as per Section 5(7) of the Code means any person to whom a financial debt is owed and includes a person to whom the debt has been assigned or transferred to. Financial Debt is defined under Section 5(8) of the Code. One of the important essential of this definition if ‘time value of money’. The aim of this article is to discuss the meaning and importance of ‘time value of money’ in the light of the Supreme Court Judgement of M/s Orator Marketing Pvt Ltd v. M/s Samtex Desinz Pvt Ltd[1] and other relevant judgements of the Supreme Court of India and National Company Law Appellant Tribunal.
TIME VALUE OF MONEY- MEANING
The concept of time value of money emerges from the concept of opportunity cost. At any given time, one has multiple options by which he can spend his money. When a person is giving up his ability to purchase to provide debt, he is expecting certain return as an opportunity cost. In the case of Nikhil Mehta v. AMR Infra Ltd[2] the National Company Law Appellate Tribunal referred to the definition of Black’s Law Dictionary to understand the meaning of time value of money. It stated that time value of money is the price associated with the length of time that an investor must wait until an investment matures or the related income is earned. The Insolvency Law Report, 2018 defined time value of money as compensation or the price paid for the length of time for which money has been disbursed.
In the case of Anuj Jain (RP) v. Axis Bank Ltd[3], it was held that any transaction enumerated under Section 5(8) would qualify as Financial Debt only if the essential component of disbursement against the consideration for the time value of money stated in the principal clause is found in its genesis.
Thus, time value of money is considered to be one of the most important elements of a Financial Debt under the Code.
FORM OF TIME VALUE OF MONEY
The form of time value of money has not been defined anywhere in the Code. Time value of code can be in different forms. For instance, typically it is in the form of interest on the principal amount borrowed. However, it can also be in terms of increase in the value of the investment of the financial creditor.
In the case of Pioneer Urban Land & Infrastructure Limited & Anr v. Union of India[4] the receipt of flat in exchange of the investment of money in the project was held to be time value of money and hence homebuyers were termed as Financial Creditors. The Supreme Court noted that time value of money is not only the regular or timely return received for the duration of the amount given but also the value gained by the buyer who makes an advance payment. It was further clarified that time value of money does not necessarily require an amount in addition to the principal. What is required is some form of benefit accruing to the creditor as a return for providing the money,
M/S ORATOR MARKETING PVT LTD V. M/S SAMTEX DESINZ PVT LTD[5]
FACTS OF THE CASE-
The Appellant was the assignee of term loan of INR 1.6 Crore. The term loan was given for the period of two years for working capital requirements of the respondent company. Even though some amount of the loan was repaid, the amount of INR 1.56 Crore was still due. The due date of the loan was 01.02.2020. However, the Section 7 petition was rejected by the National Company Law Tribunal and the National Company Law Appellant Tribunal. The ground of rejection was that there was no interest associated with the term loan and therefore, it did not come under the definition of Financial Debt under Section 5(8) of the Code.
SUPREME COURT’S CONCLUSION
The Supreme Court concluded that the National Company Law Tribunal and the National Company Law Appellant Tribunal erred when they overlooked the words “if any” in the definition of Financial Debt under Section 5(8) of the Code. Thus, even if there is no interest payable on the loan, only the outstanding principal would qualify as a financial debt and the application under Section 7 of the Code would be maintainable.
CONCLUSION
The Judgement of M/s Orator Marketing Pvt Ltd v. M/s Samtex Desinz Pvt Ltd[6] failed to take into account the time value of money. The Supreme Court overlooked the complete principle clause of the Section 5(8) of the Code and merely looked at a part of it. Even if there was no interest, there should have been some time value of money for the amount to qualify as financial debt within the meaning of Section 5(8) of the Code. This aspect of the definition was missed and therefore, in my opinion the judgement in the case of M/s Orator Marketing Pvt Ltd v. M/s Samtex Desinz Pvt Ltd[7] does not hold good.
[1] Civil Appeal No. 2231 of 2021, dated July 26, 2021
[2] Company Appeal (AT) (Insolvency) No. 7 of 2017, dated July 21, 2017; Anil Mahindra and Anr. v. Earth Iconic Infrastructure, Company Appeal (AT)(Insolvency) No. 74 of 2017, dated August 2, 2017
[3] Civil Appeal No. 8512-8527 of 2019
[4] WP (Civil) No. 43 of 2019, dated August 09, 2019; Shinoj Koshy v. Granite Gate properties Ltd, [2019] 152 SCL 125
[5] Civil Appeal No. 2231 of 2021, dated July 26, 2021
[6] Civil Appeal No. 2231 of 2021, dated July 26, 2021
[7] Civil Appeal No. 2231 of 2021, dated July 26, 2021
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