IBC | Financial Creditor Can Submit Claim Even If There Is No Default Of Debt : Supreme Court

The Supreme Court has observed a default is not necessary for a debt to become a financial debt under the Insolvency and Bankruptcy Code, 2016. 

A bench comprising Justice Abhay S Oka and Justice Augustine George Masih held that under Section 5(7) of the IBC, any person to whom financial debt is owed becomes a Financial Creditor even if there is no default in payment of debt. "Therefore, for submitting the claim by a Financial Creditor, there is no requirement of actual default," the Court held.

The Court was deciding the matter China Development Bank v. Doha Bank Q.P.S.C. & Ors and the connected appeals where the question was whether the appellants could be regarded as financial creditors.

The appeal arose out of the insolvency proceedings initiated against Reliance Infratel Limited at the instance of Ericsson India Private Limited. The appellants submitted their claims as Financial Creditors of the Corporate Debtor. While admitting the claim of the appellants, the Resolution Professional classified the appellants as Financial Creditors.

The Respondent-Doha Bank, made applications before the NCLT to challenge the admission of the claims of the appellants as Financial Creditors. The contention of the 1st respondent-Doha Bank was that the said appellants were not direct lenders of the Corporate Debtor, and it was impermissible to admit them as Financial Creditors on the basis of various terms of the Deeds of Hypothecation.

The Court, referred to the IBC provisions, observed, "Once there is a liability or obligation in respect of a claim, it becomes a debt. Once there is a financial debt, the person to whom a debt is owed, becomes a Financial Creditor."

An argument was raised that default under the Deeds of Hypothecation has not occurred. Addressing this argument, the Court observed :

"There is no requirement incorporated therein that a debt becomes financial debt only when default occurs. Under Section 5(7) of the IBC, any person to whom financial debt is owed becomes a Financial Creditor even if there is no default in payment of debt. Therefore, this argument deserves to be rejected."

The judgment added :

"There is no requirement under Section 5(8) of the IBC that there can be a debt only when there is a default. The moment it is established that the financial debt is owed to any person, he/she becomes a Financial Creditor."

If a person has a claim within the meaning of Section 3(6), he can submit it on public announcement contemplated by Section 15 being made. Therefore, for submitting the claim by a Financial Creditor, there is no requirement of actual default, the Court clarified.

The Court ultimately allowed the appeals.

Case Title : China Development Bank vs Doha Bank OPSC and others

Citation : 2024 LiveLaw (SC) 1029

Click here to read the judgment