Financial Debt under IBC 2016

 

Financial Debt under IBC 2016

Under the Insolvency and Bankruptcy Code, 2016 (IBC), financial debt is defined under Section 5(8), and it refers to any debt owed to a creditor that arises from a financial transaction or credit facility. It includes a broad category of debts typically related to borrowings or credit arrangements.

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Key Definition:

Section 5(8) of IBC defines financial debt as follows:

"Financial debt means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes money borrowed, financial lease, and any liability in respect of the bond, debenture, loan, or any other instrument for borrowing money."

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Types of Financial Debt:

1. Loans:

• Secured loans: Loans backed by assets or collateral (e.g., mortgages, hypothecation).

• Unsecured loans: Loans without any security interest.

• Overdrafts or credit facilities: Provided by banks or financial institutions.

2. Bonds and Debentures:

• Debt securities issued by corporations or governments that are payable with interest.

3. Debt Securities:

• Instruments like commercial papers, treasury bills, or certificates of deposit.

4. Financial Leases:

• An arrangement in which a company leases an asset but is essentially treated as owning it (e.g., operating leases or finance leases).

5. Securitization:

• When a financial institution sells its financial assets (like loans or mortgages) to raise funds.

6. Guarantees:

• Personal or corporate guarantees provided for debts or loans taken by others.

7. Other Borrowings:

• Any other instrument for borrowing money that falls under the definition of "debt" in the IBC.

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Key Features of Financial Debt:

Aspect	Explanation
Disbursed Debt	The debt must be disbursed in the form of money or goods, which represents the time value of money.
Time Value of Money	The repayment of the debt must be based on the principle of time value of money, which means repayment is expected to be done with interest, or at a specified time.
Interest	The debt may carry interest, which is considered part of the financial debt.
Security	Secured debts (loans backed by collateral) or unsecured debts are both considered financial debts.
Instruments	Includes instruments such as debentures, bonds, or loan agreements.

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Who Can File for Insolvency under Financial Debt?

• Financial creditors — entities who have provided loans or credit facilities — can file for Corporate Insolvency Resolution Process (CIRP) under Section 7 of the IBC.

Examples of Financial Creditors:

• Banks and financial institutions,

• Bondholders,

• Debenture holders,

• Hedge funds or private equity funds,

• Other lenders or any institution that has provided financial support or facilities.

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Application for CIRP by Financial Creditors:

1. Filing Application:

   • A financial creditor can file an application with the National Company Law Tribunal (NCLT) for the initiation of the CIRP against a corporate debtor.

2. Default:

   • The default in payment must be on the debt disbursed by the financial creditor. The default must be above the threshold limit prescribed under IBC (typically ₹1 lakh).

3. Required Documents:

   • Loan agreement or debt instrument.

   • Evidence of default (e.g., demand notices, bank statements).

   • Details of the debt and interest.

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Priority of Financial Creditors in CIRP:

1. Committee of Creditors (CoC):

   • In the CIRP process, financial creditors have significant voting power in the Committee of Creditors (CoC), as they typically hold the largest portion of the debt.

2. Priority in Distribution:

   • Financial creditors generally have a higher priority than operational creditors when it comes to distribution of proceeds from the liquidation of assets.

   • However, the distribution to financial creditors is subject to the order of priority laid out in the IBC, with secured creditors taking precedence over unsecured creditors.

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Key Judicial Precedents on Financial Debt:

1. Innoventive Industries Ltd. v. ICICI Bank Ltd. (2018):
   The Supreme Court clarified that for the CIRP process, it’s sufficient for a financial creditor to establish that there is a default and that the claim is based on a financial transaction.

2. Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC Ltd. (2019):
   The Supreme Court ruled that an operational creditor does not have the same rights as financial creditors when it comes to filing for insolvency, and only financial creditors can trigger CIRP.

3. M/S. Tata Capital Financial Services Ltd. v. M/s. Bhandari Hosiery Exports Ltd. (2019):
   The NCLAT affirmed that a financial debt is based on financial arrangements, and interest forms part of the debt.

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Conclusion:

Financial debt is a broad category that primarily includes debt related to loans, bonds, debentures, and other instruments of borrowing money. The IBC allows financial creditors to initiate insolvency proceedings against defaulting corporate debtors, giving them a prominent role in the Corporate Insolvency Resolution Process (CIRP).