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Legal Case Shots

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Legal Case Shots is a searchable database of Supreme Court of India judgments, each broken down into the case type, the court's key holding, and a practical lesson learnt, with the full judgment available as a PDF for citation or deeper reading.

Company & Insolvency LawSupreme Court of India

M/s Orator Marketing Pvt. Ltd. v. M/s Samtex Desinz Pvt. Ltd.

Civil Appeal · 2021 INSC 359Decided 26 Jul 2021
Civil Appeal No. 2231 of 2021
Justice Indira Banerjee · Justice V. Ramasubramanian

Background

A lender had given an interest-free term loan of Rs. 1.6 crore to a company to help meet its working-capital needs, and later assigned this debt to the appellant. When over Rs. 1.5 crore remained unpaid, the appellant tried to start insolvency proceedings against the company as a "financial creditor" under Section 7 of the IBC. Both the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) rejected the plea, reasoning that because no interest was charged, the loan was not a "financial debt" and the appellant could not be a financial creditor.

Decision Breakdown

The Supreme Court held that both tribunals had misread the definition of "financial debt" in Section 5(8) of the IBC: the phrase "along with interest, if any" shows that interest is optional, not essential, and even an interest-free loan can qualify if it has the "commercial effect of borrowing," as expressly covered by clause (f) of that definition. Reviewing its own precedents on the IBC's purpose, the Court concluded that a working-capital loan to a company's business clearly has this commercial effect regardless of interest. It set aside both the NCLAT and NCLT orders and revived the original insolvency petition, directing it be decided afresh in light of this clarified legal position.

Lesson Learnt

Lending money to a business interest-free does not by itself disqualify the lender from being treated as a "financial creditor" who can seek insolvency proceedings if that loan goes unrepaid.

M/s Orator Marketing Pvt. Ltd. v. M/s Samtex Desinz Pvt. Ltd. – Legal Case Shots | LegalAware