it would be appropriate to refer to the definition of legal expression ‘financial debt’ as engrafted in Section 5(8) of I&B Code, which is reproduced hereinbelow:
“5(8) "financial debt" means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes . . .
Use of expression ‘if any’ as suffix to ‘interest’ leaves no room for doubt that the component of interest is not a sine qua non for bringing the debt within the fold of ‘financial debt’.
It is manifestly clear that money advanced by a Promoter, Director or a Shareholder of the Corporate Debtor as a stakeholder to improve financial health of the Company and boost its economic prospects, would have the commercial effect of borrowing on the part of Corporate Debtor notwithstanding the fact that no provision is made for interest thereon.
Excerpts of the order;
Appellant is Promoter/Shareholder/Director of Respondent No.2 Company ‘Priority Marketing Private Limited’ (Corporate Debtor). Being aggrieved of the impugned order dated 31st August, 2018 passed by the Adjudicating Authority (National Company Law Tribunal) Mumbai Bench in Company Petition No. 1732/I&BP/2018 by virtue whereof petition filed by Respondent No. 1 – ‘Mr. Joel Cardoso’ as a ‘Financial Creditor’ under Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as ‘I&B Code’) has been admitted, moratorium slapped and Interim Resolution Professional appointed with certain directions, has assailed the impugned order primarily on the ground that the amount claimed by Respondent No. 1 is not a ‘Financial Debt’ within the meaning of Section 5(8) and Respondent No. 1 cannot be treated as a ‘Financial Creditor’ for the purposes of I&B Code.
# 5. We have gone through the record and given our anxious consideration to the submissions made at the Bar. For determination of the issue whether the amount claimed by Respondent No. 1 from the Corporate Debtor, default in payment whereof culminated in initiation of Corporate Insolvency Resolution Process, falls within the purview of ‘financial debt’ as defined under Section 5(8) of the I&B Code, be it seen that the legal expression ‘debt’, defined under Section 3 (11) means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt. It is manifestly clear that the liability or obligation to pay must arise out of a claim due from a debtor/ borrower. The nature of obligation and from where it springs is immaterial. The obligation may be contractual or otherwise. Since, the legal expression ‘debt’ includes a ‘financial debt’ across the ambit of I&B Code, it would be appropriate to refer to the definition of legal expression ‘financial debt’ as engrafted in Section 5(8) of I&B Code, which is reproduced hereinbelow:
“5(8) "financial debt" means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes . .
# 6. A plain look at the definition of ‘financial debt’ brings it to fore that the debt alongwith interest, if any, should have been disbursed against the consideration for the time value of money. Use of expression ‘if any’ as suffix to ‘interest’ leaves no room for doubt that the component of interest is not a sine qua non for bringing the debt within the fold of ‘financial debt’. The amount disbursed as debt against the consideration for time value of money may or may not be interest bearing. What is material is that the disbursement of debt should be against consideration for the time value of money. Clauses (a) to (i) of Section 5(8) embody the nature of transactions which are included in the definition of ‘financial debt’. It includes money borrowed against the payment of interest. Clause (f) of Section 5(8) specifically deals with amount raised under any other transaction having the commercial effect of a borrowing which also includes a forward sale or purchase agreement. It is manifestly clear that money advanced by a Promoter, Director or a Shareholder of the Corporate Debtor as a stakeholder to improve financial health of the Company and boost its economic prospects, would have the commercial effect of borrowing on the part of Corporate Debtor notwithstanding the fact that no provision is made for interest thereon. Due to fluctuations in market and the risks to which it is exposed, a Company may at times feel the heat of resource crunch and the stakeholders like Promoter, Director or a Shareholder may, in order to protect their legitimate interests be called upon to respond to the crisis and in order to save the company they may infuse funds without claiming interest. In such a situation such funds may be treated as long term borrowings. Once it is so, it cannot be said that the debt has not been disbursed against the consideration for the time value of the money. The interests of such stakeholders cannot be said to be in conflict with the interests of the Company. Enhancement of assets, increase in production and the growth in profits, share value or equity enures to the benefit of such stakeholders and that is the time value of the money constituting the consideration for disbursement of such amount raised as debt with obligation on the part of the Company to discharge the same. Viewed thus, it can be said without any amount of contradiction that in such cases the amount taken by the Company is in the nature of a ‘financial debt’.
# 9. The balance sheet as on 31st March, 2017 at page 83 of the reply affidavit filed by Respondent No.1, inter alia, reflects a non-current liability of Rs.4,72,76,182/- treated as ‘long term borrowings’ and not treated as shareholder’s funds. Same factual position is reflected in the communication made by the Company Auditor ‘Ganesh Mehta’, Partner ‘Ganesh and Rajendra Associates’ addressed to Respondent No.1 in his communication dated 5th December, 2017 forming Annexure D to the reply affidavit of Respondent no.1 …….
This communication reflects total unsecured loan of Rs.4,72,76,182/- against the Corporate Debtor in the books of the Company as on 31st March, 2017, the breakup showing the loan amount of Rs.1,45,36,475/- in the name of Respondent No.1.
In the face of this documentary evidence it is abundantly clear that the amount disbursed by Respondent No.1 to the Corporate Debtor was in the nature of debt treated as long term loan and not as an investment in the nature of share capital or equity. Such disbursement cannot either be treated as largesse. We are convinced that the aforesaid amount outstanding as against Corporate Debtor, default whereof is not in issue, has all the trappings of a ‘financial debt’ and falls within the purview of Section 5(8)(f) of the I&B Code and Respondent No.1 is covered by the definition of ‘Financial Creditor’.
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