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of <h1>Tribunal deems short-term loan as financial debt under Insolvency and Bankruptcy Code</h1> <h3>Preeti Bhardwaj Versus Topline Build-Tech (P) Ltd.</h3> The Tribunal determined that the short-term loan provided by the applicant, even without accruing interest, qualifies as 'Financial Debt' under the ... Maintainability of application - initiation of CIRP - non-payment of short-term loan by Corporate Debtor - Financial Creditors - whether the amount paid by the applicant as short term loan without claiming any interest comes under the definition of the 'Financial Debt' or not? - HELD THAT:- Similar issue decided in the case of M/S. ORATOR MARKETING PVT. LTD. VERSUS M/S. SAMTEX DESINZ PVT. LTD. [2021 (8) TMI 314 - SUPREME COURT] where where the issue was whether the term loan advanced to meet the working capital requirement of the Corporate Debtor which did not carry interest, comes under the definition of Financial Debt or not? and it was held that 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. In the case in hand also, as per the Board Resolution, the applicant has paid the amount to the corporate debtor without claiming any interest on that amount to meet the working capital requirements of the Corporate Debtor. But the amount has not been paid back by the Corporate Debtor to the applicant. Therefore, in terms of the decision referred, the defaulted amount comes under the definition of Financial Debt and the applicant is a Financial Creditor. Application allowed - List the matter on 14/02/2022. Issues Involved:1. Whether the amount paid by the applicant as a short-term loan without claiming any interest qualifies as 'Financial Debt' under the Insolvency and Bankruptcy Code (IBC), 2016.2. Whether the applicant qualifies as a 'Financial Creditor' under the IBC, 2016.3. Issuance of notice to the Corporate Debtor and procedural directions.Issue-wise Detailed Analysis:1. Qualification of Short-term Loan as 'Financial Debt':The primary issue was whether the short-term loan provided by the applicant to the Corporate Debtor without accruing any interest falls under the definition of 'Financial Debt' as per Section 5(8) of the IBC, 2016. The Tribunal referred to the recent Supreme Court judgment in Civil Appeal No. 2231/2021 (M/S. ORATOR MARKETING PVT. LTD. vs. M/S. SAMTEX DESINZ PVT. LTD.), where it was established that a term loan advanced to meet the working capital requirement of a Corporate Debtor, even if it did not carry interest, qualifies as 'Financial Debt.' The Tribunal highlighted the Supreme Court's interpretation that 'financial debt' includes any amount raised under any transaction having the commercial effect of borrowing, and the definition is not exhaustive but illustrative.2. Applicant as a 'Financial Creditor':The Tribunal evaluated whether the applicant, who provided a short-term loan without interest, could be considered a 'Financial Creditor' under Section 5(7) of the IBC, 2016. It referred to the Supreme Court's clarification that 'financial debt' comprises both principal and interest, if any, and the absence of interest does not disqualify the principal amount from being considered a financial debt. The Tribunal concluded that since the applicant had provided the loan to meet the working capital requirements of the Corporate Debtor, and the amount was not repaid, the applicant qualifies as a 'Financial Creditor.'3. Issuance of Notice and Procedural Directions:Upon determining that the applicant qualifies as a Financial Creditor and the loan as Financial Debt, the Tribunal ordered the issuance of notice to the Corporate Debtor. The notice was to be served through all modes, including email, with an affidavit of service to be filed within a week. The Corporate Debtor was directed to file a reply within two weeks of receiving the notice, and the applicant was allowed to file a rejoinder within a week of receiving the reply. The matter was listed for further hearing on 14/02/2022.The Tribunal's decision to issue notice and proceed with the Corporate Insolvency Resolution Process (CIRP) was based on the established default and the definitions under the IBC, 2016, as interpreted by the Supreme Court.
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