Insolvency and Bankruptcy Code, 2016 – Whether there can be debt within the meaning of sub-section (11) of section 5 of the 2016 Code.

Held: There cannot be a debt within the meaning of sub-section (11) of section 5 of the IBC unless there is a claim within the meaning of sub-section (6) of section 5 of thereof. [Para 20 (a)]

Insolvency and Bankruptcy Code, 2016 – sub-section (8) of s. 5 – What is the test to determine whether a debt is a financial debt within the meaning of sub-section (8) of section 5 of the 2016 Code.

Held: Sub-section (8) of section 5 defines “financial debt” – The definition incorporates the expression “means and includes” – The first part of the definition, which starts with the word “means”, provides that there has to be a debt along with interest, if any, which is disbursed against the consideration for the time value of money – The word “and” appears after the word “money” – Before the words “and includes”, the legislature has not incorporated a comma – After the word “includes”, the legislature has incorporated categories (a) to (i) of financial debts – Thus, the test to determine whether a debt is a financial debt within the meaning of sub-section (8) of section 5 is the existence of a debt along with interest, if any, which is disbursed against the consideration for the time value of money – The cases covered by categories (a) to (i) of sub-section (8) must satisfy the said test laid down by the earlier part of sub-section (8) of section 5. [Paras 12 and 20 (b)]

Insolvency and Bankruptcy Code, 2016 – Is it necessary to ascertain what is the real nature of the transaction reflected in the writing, while deciding the issue whether a debt is a financial debt or an operational debt.

Held: While deciding the issue of whether a debt is a financial debt or an operational debt arising out of a transaction covered by an agreement or arrangement in writing, it is necessary to ascertain what is the real nature of the transaction reflected in the writing – The written document cannot be taken for its face value. [Paras 20 (c) and 14]

Insolvency and Bankruptcy Code, 2016 – When is the debt, an operational debt:

Held: Where one party owes a debt to another and when the creditor is claiming under a written agreement/ arrangement providing for rendering ‘service’, the debt is an operational debt only if the claim subject matter of the debt has some connection or co-relation with the ‘service’ subject matter of the transaction. [Para 20 (d)]