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SC decision in Orator Marketing: The test for 'Financial Debt' under IBC, 2016

Published: Aug 26, 2021

By Syed Peeran, Aniruddha A. S. and Akshita Bohra

In a recent decision in Orator Marketing Private Limited v. Samtex Desinz Private Limited (Civil Appeal No. 2231/2021 dated 26.07.2021 = 2021-TIOLCORP-28-SC-IBC), the Hon'ble Supreme Court had occasion to answer the question as to what constitutes a 'financial debt' under Sec. 5(8) of the Insolvency and Bankruptcy Code, 2016 ('the Code'). The context for this reference arose from two concurrent decisions, one of the NCLT, Bench at New Delhi and another of NCLAT that had held that interest-free loans do not constitute a 'financial debt'. Accordingly, the Tribunals below had dismissed the petition filed by the Appellant under Sec. 7 of the Code. The Supreme Court in Orator set aside these rulings and held that an interest-free loan does constitute a 'financial debt'.

The reasoning in Orator Marketing

The Apex Court gave four reasons for reaching its conclusion. First, the Court considered the phrase - "along with interest, if any," in Sec. 5(8) to hold that a financial debt need not always have an interest component. Second, the Court referred to sub-clause (f) of Sec. 5(8) to conclude that interest free loans also have the commercial effect of borrowing to be considered as 'financial debt'. Third, the Court interpreted the word "include" before sub-clauses (a) to (i) of Sec. 5(8) to find that the sub-clauses in the definition of financial debt are "apparently illustrative and not exhaustive". Fourth, the Court reasoned that since there is no express exclusion of interest-free loan in the definition, financial debt "would have to be construed" to include such loans.

The conclusion arrived at by the Court along with the reasoning adopted therein raise certain concerns with respect to the definition of 'financial debt' under the Code. These concerns primarily relate to the concept "consideration for the time value of money" appearing in the definition clause and arise as there appears to be some dissonance between the decision in Orator and the prior Supreme Court decision in Anuj Jain v. Axis Bank, (2020) 8 SCC 401.

Test of a financial debt in Anuj Jain

In the decision in Anuj Jain, the Supreme Court had inter alia held that for a financial debt to exist, there had to be a "disbursement" against the "consideration for the time value of money". These two elements appearing in the principal clause had to be satisfied by any of the illustrations enumerated in sub-clauses (a) to (i) of Sec. 5(8). Only upon such satisfaction could a financial debt be said to exist. The decision in Orator refers to and extracts in extenso the relevant observations in Anuj Jain. However, the ratio in Anuj Jain does not appear to have been applied in its entirety to the case at hand.

In Orator, the element of "disbursement" of the amount was not in dispute. Both parties to the dispute agreed that an interest-free loan was indeed advanced. Therefore, what remained to be identified was the element of "consideration for the time value of money" in the interest free loan transaction between the parties. To satisfy the test laid down in Anuj Jain, the Court had to identify the element of "consideration for the time value of money" with reference to the loan agreement and surrounding circumstances. It was only upon such satisfaction of the principal clause that the sub-clauses (a) to (i) of Sec. 5(8) could be pressed into service.

Orator 's departure in applying the principles in Anuj Jain

However, the Court adopted a different approach and instead straightaway referred to the phrase "commercial effect of a borrowing" in sub-clause (f) of Sec. 5(8) to rule that since such interest free loans obviously had a commercial effect of a borrowing, it would qualify as a financial debt. While ruling so, the Court departed from its view in Anuj Jain, wherein it was categorically held that though a transaction may fall in any of the sub-clauses (a) to (i), it had to have traces or elements of the principal clause, namely "disbursement" and "consideration for the time value of money", to constitute a financial debt. The Court did not enter upon such examination.

The Court then considered the scope of the 'means and include' clause appearing in Sec. 5(8). While the Court set out the principles for interpreting such clauses and referred to the relevant case law, it did not apply those principles to its interpretation of the section. Significantly, even in Anuj Jain, the Court had cautioned against interpreting the "include" clause so expansively so as to unmoor it from the "means" clause appearing in the principal definition.

As held in Anuj Jain, the illustrations in sub-clauses (a) to (i) stated in an inclusive manner ultimately owed their existence to the "means" clause appearing in the principal definition. The illustrations under the "include" clause did not and could not have any standing dehors the principal clause. Therefore, while the sub-clauses (a) to (i) are certainly "apparently illustrative and not exhaustive" as held by the Court in Orator, they could not have been independently read to include interest free loans without reference to the "means" clause in the principal definition. In Orator, the Court appears to have considered the inclusive nature of the sub-clauses (a) to (i) to also include an interest-free loan, without identifying the "consideration for the time value of money" element in the loan transaction to bring it within the "means clause".

Finally, the Court held that since there is no express exclusion of interest free loans, the same would have to be included in the definition of 'financial debt'. In the authors' view there is a reason that the Code is at pains to define financial debt with some exactitude, while at the same time building in some flexibility. Hence, the means and include clause. However, the Court's finding on this point may render the elaborate definition in the provision otiose. This is because there may be several transactions (in an ever-changing business landscape) that may be a debt, but not a financial debt under the Code. This finding of the Court may also have unintended consequences in inviting unscrupulous litigants claiming to be 'financial creditors' and invoking the stringent provisions of the Code.


Interest bearing loans are generally recognized to constitute 'financial debt' under the Code, the interest component being the "consideration for the time value of money". It is equally clear that interest component is not necessary for constituting a financial debt. However, it is unclear what would be the "consideration for the time value of money" in an interest free loan. Is it the purpose for which it is granted, is it the non-monetary or intangible benefits to the creditor, is it the business advantages that may thereby accrue to the debtor or is it the obligations undertaken by the debtor to reinstate the creditor to its original position? While the NCLAT has wrestled with some of these questions in previous decisions, the answers have varied according to the facts and circumstances of each case. Therefore, the stage was ripe for a test to be formulated, if possible, for what constitutes a "consideration for the time value of money" in such interest free loan transactions. In not engaging with the requirements for constituting "consideration for the time value of money", the decision in Orator certainly represents a missed opportunity.

[ Syed Peeran is a Joint Partner, Aniruddha A. S. is a Senior Associate and Akshita Bohra is an Associate at Lakshmikumaran and Sridharan, Attorneys, Bangalore. The views expressed are strictly personal.]