Why did the Supreme Court skip the ‘time value of money’ analysis in Orator Marketing v Samtex Desinz?
As per section 5(8) of the Insolvency and Bankruptcy Code, 2016 (“IBC”), a “financial debt” is defined as a debt along with interest, if any, which is disbursed against consideration for the time value of money. In its decision in Orator v Samtex, the Hon’ble Supreme Court clarified that an interest-free loan would be regarded as a financial debt and thus settled the question of whether an obligation to pay interest is necessary to constitute a financial debt.
However, at least one observer has noted that the Supreme Court did not go into the question of whether the loan in the case at hand had been disbursed against consideration for the time value of money. This is a fair observation considering the Supreme Court’s previous decisions in Pioneer and Jaypee Infratech, both of which discussed the meaning of ‘time value of money’ in some detail. This piece offers an explanation for why the Supreme Court may have steered clear from a ‘time value of money’ analysis.
The Supreme Court’s Reasoning
The only material fact in this case is that an interest-free loan had been extended to the corporate debtor but had not been fully repaid. (However, please consider reading this case analysis or this one for a more elaborate discussion of the facts and issues in the case).
In determining that an interest-free loan would constitute a financial debt under section 5(8) of the IBC, the Supreme Court set aside the decision of the Hon’ble National Company Law Appellate Tribunal (“NCLAT”). As per the NCLAT’s reading of the definition of ‘financial debt’, where money had not been borrowed against the payment of interest, it would be necessary to determine whether or not there was consideration for the ‘time value of money’. The NCLAT, of course, held that there was in fact no such consideration.
This line of inquiry did not find favour with the Supreme Court, which instead focussed on the words “if any”, which follow immediately after the words “debt alongwith interest” in section 5(8). This led the Supreme Court to conclude that the definition of ‘financial debt’ does not specifically exclude an interest-free loan and that the outstanding principal amount could constitute a financial debt on a standalone basis.
Further, the Supreme Court looked to section 5(8)(f) of the IBC and observed that the loan in question was, in effect, an amount raised in a transaction having the ‘commercial effect of borrowing’ and should therefore fall within the purview of a financial debt. As in the cases of Pioneer and Jaypee Infratech, the Court also examined the import of the word “includes” in section 5(8) of the IBC and concluded that clauses (a) to (i) of section 5(8) are merely illustrative and not exhaustive (although it is not immediately clear why this was relevant in this case).
What about ‘Time Value of Money’?
As mentioned above, one aspect of the definition of ‘financial debt’ that seems to have escaped the Supreme Court’s scrutiny is the issue of whether the loan in question was disbursed against consideration for the time value of money. There could be two reasons for this:
First, the Court may have felt that the ‘time value of money’ component was implicitly built into the loan and did not need to be explicitly called out. After all, ‘time value of money’ is simply the idea that money is worth more today than it would be in the future. Section 5(8) of the IBC does not set any parameters for what the time value of money should be or how it should be quantified. All that is required is that the disbursal of the debt should be against consideration for the time value of money. There is no requirement that a debtor’s repayment obligation should adequately compensate a creditor for time value of money (and it may very well be impractical for a quasi-judicial body to undertake an exercise in this regard). Viewed in this context, any advance of money would be a disbursal against consideration for time value of money and would constitute a financial debt (albeit a lender’s money may be worth less in cases where an advance is made for low or no interest).
The second reason (and perhaps the more controversial reason) is that the Court may not have regarded ‘time value of money’ to be an essential ingredient of a financial debt if the debt otherwise falls into one of the categories set out in clauses (a) to (i) of section 5(8). In Orator, the Supreme Court took the view that the loan in question would fit neatly into clause (f) – an amount raised having the commercial effect of a borrowing. Might the Supreme Court have determined that since the loan was covered by section 5(8)(f), there was no need to query whether the loan was disbursed against consideration for the time value of money? If so, the Court’s reasoning in Orator would appear to fly in the face of the ruling in Jaypee Infratech, where the Supreme Court held that there needs to be a disbursal against consideration for time value of money even in respect of transactions covered in clauses (a) to (i) of section 5(8):
“46. Applying the aforementioned fundamental principles to the definition occurring in Section 5(8) of the Code, we have not an iota of doubt that for a debt to become “financial debt” for the purpose of Part II of the Code, the basic elements are that it ought to be a disbursal against the consideration for time value of money. […] The requirement of existence of a debt, which is disbursed against the consideration for the time value of money, in our view, remains an essential part even in respect of any of the transactions/dealings stated in clauses (a) to (i) of Section 5(8), even if it is not necessarily stated therein. […] In other words, any of the transactions stated in the said clauses (a) to (i) of Section 5(8) would be falling within the ambit of “financial debt” only if it carries the essential elements stated in the principal clause or at least has the features which could be traced to such essential elements in the principal clause.”
The Jaypee Infratech case was decided by a 2-Judge Bench (comprising A.M. Khanwilkar and Dinesh Maheshwari, JJ). Prior to this decision, a 3-Judge Bench of the Supreme Court (comprising R.F. Nariman, Sanjiv Khanna and Surya Kant, JJ) adjudicated the Pioneer case, which confirmed the status of real estate allottees as financial creditors under the IBC. In this case, the Court examined the meaning of the term ‘time value of money’ and concluded that advances made by real estate allottees towards construction of a project is consideration against the time value of money. However, the Court also appeared to delink the transactions covered in clauses (a) to (i) of section 5(8) from the main part of the definition:
“82. This statement of the law, as can be seen from the quotation hereinabove, is without citation of any authority. In fact, in Jagir Singh v. State of Bihar, SCC paras 11 and 19 to 21 and Mahalakshmi Oil Mills v. State of A.P., SCC paras 8 and 11 (which has been cited in P. Kasilingam, this Court set out definition sections where the expression “means” was followed by some words, after which came the expression “and includes” followed by other words, just as in Krishi Utpadan Mandi Samiti case. […] From this discussion, two things follow. Krishi Utpadan Mandi Samiti cannot be said to be good law insofar as its exposition on “means” and “includes” is concerned, as it ignores earlier precedents of larger and coordinate Benches and is out of sync with later decisions on the same point. Equally, Dr Singhvi’s argument that clauses (a) to (i) of Section 5(8) of the Code must all necessarily reflect the fact that a financial debt can only be a debt which is disbursed against the consideration for the time value of money, and which permeates clauses (a) to (i), cannot be accepted as a matter of statutory interpretation, as the expression “and includes” speaks of subject-matters which may not necessarily be reflected in the main part of the definition.”
The decision in Jaypee Infratech appears to be per incuriam insofar as it holds that a transaction covered by clauses (a) to (i) of section 5(8) must satisfy the requirement of being a disbursal against consideration for the time value of money in order to constitute a financial debt. The larger bench in Pioneer rejected the suggestion that the ‘time value of money’ ingredient permeated through clauses (a) to (i) of section 5(8).
Although the question in Orator itself was not particularly significant, the Supreme Court was presented with an opportunity to settle (or at least highlight) the inconsistency between Pioneer and Jaypee Infratech. On the one hand, it could be argued that the Court effectively followed the rule in Pioneer since it ignored the ‘time value of money’ analysis once it was satisfied that the loan in question fit into section 5(8)(f). On the other hand, it could be argued that ‘time value of money’ was implicitly built into the loan and that the Court did not actually reject the ‘time value of money’ requirement even though the loan fit into section 5(8)(f), which would be in line with the ruling in Jaypee Infratech. In any case, the Court chose not to address the issue explicitly and it is thus likely to crop up again.