Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd.

Background: In the judgment delivered on July 26, 2021, the Hon’ble Supreme Court of India in Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd. held that the definition of the term “Financial Debt” in Section 5(8) of the Insolvency and Bankruptcy code, 2016 (IBC) is not exhaustive in nature and are illustrative.

1. What were the facts of the case?

  • Samtex Desinz Pvt. Ltd (“CD”) availed a term loan to the tune of INR 14 Crores from Tata Capital Financial Services Ltd. All assets of the borrower were mortgaged in favour of the lender. However the same was not enough to meet the working capital requirement of the CD.
  • The CD was short of approx. INR 2 Crores and no other institution was in favour of providing unsecured loan to the CD, and thus, Sameer Sales Private Limited (“FC”) agreed to extend a loan of Rs 1.60 Crores to the CD for two years and the loan was supposed to be paid by Feb 1, 2020 to the FC.
  • The CD defaulted in payment of the said debt, and thus, the FC proceeded to file an application u/S 7 of the Insolvency and Bankruptcy Code, 2016 (“IB Code”) seeking initiation of Corporate Insolvency Resolution Process (“CIR Process”) of the CD.
  • The Hon’ble National Company Law Tribunal, being the Adjudicating Authority (“AA”) rejected the Application of the FC on the ground that there the same was an interest free loan and hence the same would not come under the umbrella of financial debt in accordance to Section 5(8) of the IB Code.
  • Being aggrieved by the said rejection of the AA, the FC filed an Appeal under Section 61 of the IB Code before the Hon’ble National Company Law Appellate Tribunal (“NCLAT”), however the NCLAT also dismissed the Appeal of the FC while upholding the order of the AA.
  • The FC thus filed an Appeal before the Hon’ble Supreme Court of India u/S 62 of the IB Code.

2. What was the key issue and what did the Hon’ble Supreme Court of India rule?

  • The main issue was whether the FC falls within the contours of Financial Creditor and Financial Debt having provided an interest free loan to the CD and as such, whether it is eligible to file an application u/S 7 of the IB Code.
  • It was held that the definition of “financial debt” given under Section 5(8) of the IB Code is not exhaustive but rather illustrative. Explanation or definition of such terms can be either restrictive or extensive. If the term has been defined to include something, the definition becomes prima facie extensive.
  • The Hon’ble Supreme Court of India thus held that the AA and NCLAT have wrongly misconstrued the meaning of the Financial Debt as defined u/S 5(8) of the IB Code.

3. Can a loan without interest be considered as a Financial Debt?

The Hon’ble Supreme Court of India has now undisputedly held that an interest free loan can be considered as a financial debt.

It has been made it amply clear, while referring to the previous landmark judgments of the Hon’ble Supreme Court of India, that explanation or definition of such terms can be either restrictive or extensive. If the term has been defined to include something, the definition becomes prima facie extensive.

Furthermore, the term “financial debt” under section 5(8) of IB Code is not exhaustive but extensive.

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