Interest free loan to corporate person to be classified as Financial Debt u/s 5(8) of IBC

Conclusion: Loan to Corporate Person free of interest to be as classified Financial Debt in Section 5(8) of IBC  and therefore, a Financial Creditor was competent to initiate the Corporate Resolution Process under Section 7 of the IBC.

Held: The issue arose for consideration was whether a person who gave a term loan to a Corporate Person, free of interest, on account of its working capital requirements was not a Financial Creditor, and therefore, incompetent to initiate the Corporate Resolution Process under Section 7 of the IBC. It was held that the trigger for initiation of the Corporate Insolvency Resolution Process by a Financial Creditor under Section 7 of the IBC was 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. Thus, the order of the Adjudicating Authority, dismissing the petition of assessee-company under Section 7 of the IBC was also set aside.

FULL TEXT OF THE SUPREME COURT JUDGEMENT