Abstract

The purpose of this research article is to provide a legal review of the meaning of “financial debt” as stated in the Insolvency and Bankruptcy Code, 2016 by examining how mortgages, guarantees and obligations related to payment all work together with respect to creditors. Further, it discusses the significant role that a creditor’s classification plays in the operational structure of the Committee of Creditors through their determination or interpretation of the term “financial debt” within Section 5(8) of the Code with an emphasis on the “disbursement” requirement related to time value of money. The research compares the development/judicial history (the judicial evolution) of this interaction between financial debt through case law where creditors defined financial debt narrowly (but excluded from this definition all types of secured loans) when a corporate debtor only serves as a third-party mortgagor (the corporate debtor). The article explains how transactions where no actual loan was provided, no actual financial accommodation was made to a corporate debtor and, therefore, do not fulfil the basic requirements of financial debt have been determined previously to not be financial debt. Nevertheless, this understanding has been refined through subsequent case law, where courts ultimately applied a more substantiated/realistic interpretation in their analysis of financial debt. At the same time, this raises concern about potentially creating ambiguity between secured and financial creditors. In conclusion, the article proposes that a systematic and principled approach (i.e. based on the nature of the obligation, intention of the parties involved, and overall transactional structure) should be employed in order to provide for doctrinal clarity and consistency in relation to insolvency matters.

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