Financial Debt – Under Insolvency & Bankruptcy Code

Thus, in order to be a “debt”, there ought to be  a liability or obligation in respect of a “claim” which is due from any person. “Claim” then means either a right to payment or a right to payment arising out of breach of contract, and this claim can be made whether or not such right to payment is reduced to judgment. Then comes “default”, which in turn refers to non-payment of debt when whole or any part of the debt has become due and payable and is not paid by the corporate debtor.

            What is clear, therefore, is that a debt is a liability or obligation in respect of a right to payment, even if it arises out of breach of contract, which is due from any person, notwithstanding that there is no adjudication of the said breach, followed by a judgment or decree or order. The expression “payment” is again an expression which is elastic enough to include “recompense”, and includes repayment.

            The definition of “financial debt” in Section 5(8) then goes on to state that a “debt” must be disbursed against the consideration for time value of money. “Disbursement” is defined in Black’s Law Dictionary (10th Edition) to mean:

  1. The act of paying out money, commonly from a fund or in settlement of a debt or account payable. 2. The money so paid; an amount of money given for a particular purpose.

In short, the “disbursal” must be money and must be against consideration for the “time value of money”, meaning thereby, the fact that such money is now no longer with the lender, but is with the borrower, who then utilizes the money. In the Dictionary of Banking Terms (2nd Edition) by Thomas P. Fitch, “time value for money” is defined thus:

            “present value” today’s value of a payment or a stream of payment amount due and payable at some specified future date, discounted by a compound interest rate of discount rate. Also called the time value of money. Today’s value of a stream of cash flows is worth less than the sum of the cash flows to be received or saved over time. Present value accounting is widely used in discounted cash flow analysis.”

            As per the precise language of Section 5(8)(f) of the Insolvency and Bankruptcy Code, which appears to be a residuary provision, whereas it is “catch all” in nature. This is clear from the words “any amount” and “any other transaction” which means that amounts that are “raised” under “transactions” not covered by any of the other clauses, would amount to a financial debt if they had the commercial effect of a borrowing.

            The expression “any other transaction” would include an arrangement in writing for the transfer of funds to the corporate debtor. Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416.

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