Are Interest-Free Loans “Financial Debt” under the IBC? The Supreme Court’s Answer and Its Limits

Money often moves between group companies, from promoters into their businesses, or from friendly investors, without any stipulated interest. When the recipient later enters insolvency, the question is whether the provider is a financial creditor with a seat on the committee of creditors, or merely another creditor with no vote. Whether an interest-free loan qualifies as financial debt under the IBC depends on the nature of the transaction and whether the disbursal was made against the consideration for the time value of money under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (“IBC”). The Supreme Court has held that an interest-free term loan can qualify as financial debt, but the principle operates within limits that matter.

Orator Marketing: Interest-Free Term Loans

In Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd., (2023) 3 SCC 753 (decided 26 July 2021), the Supreme Court considered an interest-free term loan advanced to a company to meet its working capital requirement. The NCLT and NCLAT had held that the absence of interest took the transaction outside Section 5(8).

The Supreme Court disagreed. The definition in Section 5(8) refers to a debt “along with interest, if any“, which shows that interest is not essential to the concept. The Court held that the definition must be read as a whole, that the expression “financial debt” includes a debt disbursed against consideration for the time value of money, and that an interest-free term loan advanced to finance business operations qualifies. It also cautioned against a narrow reading that would exclude genuine lenders from the committee of creditors.

Global Credit Capital: Look at the Real Nature of the Transaction

In Global Credit Capital Ltd. v. Sach Marketing Pvt. Ltd. (Supreme Court, 25 April 2024), the Court considered security deposits placed with a corporate debtor under agreements that also described services to be rendered. It held that the question whether a creditor is financial or operational turns on the real nature of the transaction, ascertained from the documents read as a whole and the surrounding circumstances, and not merely on the label used. On the facts, the deposits carried an assured return and were treated as financial debt.

The two decisions together set the approach: identify the disbursal, then ask whether the transaction amounts to financial debt by examining what the provider was to receive in return for parting with the money over time.

When Does an Interest-Free Advance Fail as Financial Debt?

Orator Marketing does not make every interest-free advance a financial debt.

• No disbursal to the corporate debtor. In Anuj Jain, IRP for Jaypee Infratech Ltd. v. Axis Bank Ltd., (2020) 8 SCC 401, the Supreme Court held that a person whose only connection is security furnished by the corporate debtor for another’s debt is not a financial creditor, because nothing was disbursed to the corporate debtor.
• No time value element at all. A gratuitous advance, or a payment made for a purpose unrelated to the use of money over time, lacks the consideration the section requires.
• Trade advances. An advance towards the supply of goods or services is ordinarily operational debt under Section 5(21), unless it has the commercial effect of a borrowing.
• Equity contributions. Money contributed as share capital is not debt; the fact that it was expected to yield returns does not convert it.

Promoter and Group-Company Funding

Interest-free promoter or group funding raises two further issues even where it qualifies as financial debt.

Related-party exclusion. Under the first proviso to Section 21(2), a financial creditor that is a related party of the corporate debtor has no right of representation, participation or voting in the committee of creditors. The debt is recognised, but control is not. Section 5(28), as amended in 2026, now defines voting share by reference to debt owed to committee members eligible to vote, aligning the arithmetic with that exclusion.

Avoidance risk. Repayments made to related parties before insolvency may be examined as preferential transactions under Section 43, for which the look-back for related parties is two years. Since 26 May 2026, that period is measured from two years preceding the initiation date and ends on the insolvency commencement date, covering the period between filing and admission.

Evidence that Decides these Cases

Tribunals generally examine the following evidence when determining whether an advance qualifies as financial debt:

• a written agreement or board resolution recording the advance and its terms;
• treatment in the audited accounts of both parties, including whether the amount is shown as borrowings;
• how the money was used by the recipient, in particular whether it financed business operations;
• any agreed return, premium, conversion right or other benefit; and
• the conduct of the parties, including repayments and acknowledgments.

Position from 26 May 2026

The definition of financial debt was not amended. Related changes relevant to such claims include Explanation II to the substituted Section 7(5), under which a record of default with an information utility filed by a financial institution is sufficient to ascertain default, and Section 215(4), under which information not authenticated by the debtor within the specified period is deemed authenticated. A private lender that is not a financial institution does not get the benefit of Explanation II and must still establish debt and default on the evidence.

Key Takeaways

• An interest-free loan can be a financial debt; the absence of interest is not decisive.
• What matters is a disbursal and a return that reflects the use of money over time, judged by the real nature of the transaction.
• Security given by a corporate debtor for another’s borrowing does not make the beneficiary its financial creditor.
• Even genuine related-party financial creditors are excluded from voting in the committee of creditors.

FAQs

1. Can an interest-free loan be financial debt under the IBC?

Yes. An interest-free term loan can qualify as financial debt if it satisfies the requirements of Section 5(8), as held in Orator Marketing.

2. Does an interest-free advance automatically qualify as financial debt?

No. The real nature of the transaction, the disbursal, and the consideration for the time value of money must be examined.

3. Can a promoter be a financial creditor?

Yes. A promoter’s interest-free loan can qualify as financial debt, but related-party rules may prevent the promoter from voting in the CoC.

4. Does a trade advance qualify as financial debt?

Ordinarily, no. An advance for goods or services is generally operational debt unless the transaction has the commercial effect of a borrowing.

5. Can a related-party financial creditor vote in the CoC?

No. Under Section 21(2), a related-party financial creditor is generally excluded from representation, participation and voting in the CoC.

Legal Information Disclaimer

This article provides general information about Indian law as it stood on 16 September 2026. It is not legal advice, and reading it does not create an advocate–client relationship. Statutes, rules and judicial interpretations change, and their application depends on the facts of each matter. Readers should consult the current official text of the laws and judgments cited and should not act on this information without advice specific to their circumstances. This article is published for legal awareness and education and is not intended to advertise or solicit professional work.

Sources / Authorities

1. Insolvency and Bankruptcy Code, 2016 — Sections 5(7), 5(8), 5(21), 5(28), 7, 21, 43, 215 (as amended) — IBBI – Legal Framework
2. Insolvency and Bankruptcy Code (Amendment) Act, 2026 (No. 6 of 2026) — Gazette text (IBBI); Notification S.O. 2625(E) dated 22 May 2026 — IBBI
3. Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd., (2023) 3 SCC 753, Supreme Court of India, 26 July 2021
4. Global Credit Capital Ltd. v. Sach Marketing Pvt. Ltd., Supreme Court of India, 25 April 2024
5. Anuj Jain, IRP for Jaypee Infratech Ltd. v. Axis Bank Ltd., (2020) 8 SCC 401, Supreme Court of India