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JC - Legal Updates - Lenders of interest free loans also financial creditors under IBC-Supreme Court

Legal Updates

31 Jul 2021

Lenders of interest free loans also financial creditors under IBC-Supreme Court

The definition of ‘financial debt’ in Section 5(8) of Insolvency and Bankruptcy Code, 2016 (“IBC”) to be construed to include interest free loans advanced to finance the business operations of a corporate body.

This was held by the Supreme Court in its judgment dated 26th July 2021 in matter of M/s. Orator Marketing Pvt. Ltd. v. M/s. Samtex Desinz Pvt. Ltd.

The Court in the matter referred to section 5(8) of the IBC which defines 'financial debt' to mean "a debt along with interest if any”. It observed that the National Company Law Tribunal (“NCLT”) and the National Company Law Appellate Tribunal (“NCLAT”) have overlooked the words "if any" in section 5(8), which could not have been intended to be otiose. The Court held that in view of the definition, if there is no interest payable on the loan, only the outstanding principal would qualify as a financial debt.

The Court in the matter further observed that NCLT and NCLAT had failed to notice section 5(8)(f) of IBC whereby 'financial debt' includes amount raised under any other transaction, having the commercial effect of borrowing.

In view of the above observations, the Court allowed the appeal and set aside the impugned order of the NCLT, whereby the NCLT had dismissed the section 7 petition filed by the Appellant, holding that since the Appellant’s loan was interest free, it was not a financial creditor under IBC.


For any further information, please contact Mr. Shubhabrata Chakraborti (shubhabrata.chakraborti@jclex.com) or Mr. Dhruv Malik (dhruv.malik@jclex.com).