Decoding Inconsistent Interpretations of “time value of money” in Financial Debt

The author is Kaishena Chauhan, a third year student at Jindal Global Law School.

Introduction

Holding the debtors responsible for defaults and aiding the creditors to get the desirable relief are the most invoked among all the aims of the Insolvency and Bankruptcy Code, 2016 (Code). The Code provides a balance between the debtors, who wish to enjoy credit availability, and the creditors, who fear the consequences of default. Here, debt becomes an essential element to understand. Section 5(8) of the Code defines “Financial Debt”. This financial debt becomes a core contention on which insolvency applications are argued. Thus, by being the backbone of several cases, it is subjected to different interpretations, especially the term “time value of money”. This blog intends to put forth the interpretations and discussions concerning the “time value of money” in financial debt. Since the Code is not specific or universal towards its interpretation, the Blog uses several judgments and hence, concludes that the muddled jurisprudence on “time value of money” requires attention.

About Section 5(8) of the Code (Section)

The relevant part of the definition of “Financial Debt” as per the Section, reproduced herein below -

“Financial debt means a debt along with interest, if any, which is disbursed against the consideration for the time value of money….”

A simple interpretation implies that a financial debt can be any amount, with or without an interest factor, given against some consideration. Here, “time value of money” is the genesis of the definition and its interpretation becomes significant. The Supreme Court in Anuj Jain v. Axis Bank Limited observed that the Section cannot be given an expansive meaning to sacrifice the element of ‘disbursement’ against the ‘consideration for the time value of money’. The association of the “time value of money” with financial debt as its “pre-condition” and an “indispensable element” has evolved.

Interpretation of “time value of money” in the Section

As per Dinesh Changela Windfield v. Berkmann Pvt. Ltd., “time value of money” is about the date of repayment or the time fixed for repayment. Therefore, it means if there is no time fixed for repayment of debt, it will not be a financial debt. The rationale behind this interpretation is that financial debts are generally given for a big amount, and a lender must be vigilant enough to state the time of returning such money. It is argued that not mentioning a repayment date will mean that there cannot be default in the first place as it will not legally become due, and hence, there does not arise any need for insolvency proceedings.

Another interpretation equates the “time value of money” with interest. In Good Value Financial Services Private Limited v. ARK Landscapes LLP, Pushpa Shah and Another v. I.L. and F.S. Financial Services Ltd. and Another, the element of “time value of money” was found to be missing as there was no evidence to show that the debt is refundable with interest. However, this interpretation creates redundancy as the Section explicitly includes the element of interest in its definition. The term “interest, if any” implies that the interest is not a compulsion, and it may or may not be stipulated by the creditor. The Tribunal here interpreted financial debt to be a “loan transaction i.e., debt with interest” and this interest was said to be the “time value of money” of this loan. Here this explanation again becomes faulty for the same reason.

It is pertinent to note that the “time value of money” is a “pre-condition” i.e., mandatory requirement. While the interest factor, being “if any”, is a discretionary requirement. Now, because of the difference in nature of both the terms of the definition, the Section gets contradictory if “time value of money” is equated with interest.

Moreover, the Tribunals have noted the Black Law Dictionary’s description. It defines “time value” as “the price associated with the length of time that an investor must wait until an investment matures or the related income is earned”. Similarly, the Insolvency Law Report, 2018 interpreted “time value” as “compensation or the price paid for the length of time for which the money has been disbursed”. This implies that there has to be an amount to make good on the length for which the debt is given. Indirectly points towards interest. And again, the loop of contradictions begins. It is argued that this interpretation becomes problematic in cases where there is no stipulation of any interest, making it an easy defense in favor of the debtor. Thereby develops a hindrance in achieving the objectives of the Code by adversely affecting the creditor.

The term has experienced futile efforts of interpretation, leading to complexity. The case of Earth Gracia Buildcon Pvt. Ltd. v. Earth Infrastructure Ltd., attempted to clarify the present contradiction. It stated that the term “time value of money” does not require an interest factor. Moreover, the Tribunal gave a distinction by stating that “‘if any’ as a suffix to ‘interest’…the component of interest is not a sine qua non…. The amount disbursed as a debt…may or may not be interest bearing”; and, “the words “time value” have been interpreted to mean compensation or the price paid for the length of time for which the money has been disbursed. This may be in the form of interest paid on the money, or factoring of a discount in the payment”. Here, even though this attempt separates “time value of money” with “interest, if any”, however, it fails to give an independent explanation of the term.

Additionally, in Sach Marketing Pvt. Ltd. v. Resolution Professional of Mount Shivalik Industries, the Tribunal noted that ““if any” which could not have been intended to be otiose. Financial debt means outstanding principal due in respect of a loan... If there is no interest payable on the loan, only the outstanding principal would qualify as a financial debt”. Similarly, in Pioneer Urban Land and Infrastructure Ltd. & Anr. v. Union of India & Ors., the SC noted that “time value of money” is some form of “benefit accruing to the creditor as a return for providing money”, which need not be an interest. Here clearly, equating “time value” with interest goes against the intention of the definition and it “illogical”. These decisions uphold the discretionary nature of the interest. Thus, producing “time value of money” as a separate mandatory condition.

The dilemma created by varied interpretations

The above-mentioned judgments are required to highlight the debatable aspect of the definition, and shows an attempt to entangle the existing paradox. However, instead of elaborating on the terms, these judgments have generated more concerns. For instance, they now give two options to the adjudicating authorities- first, to interpret “time value” as interest (arises confusion for its mandatory or discretionary nature) and second, to hold it mandatory and give some explanation to it (since there exist no independent interpretation).

The implication of these two interpretations put the financial creditor in a vulnerable position. These two options highlight a “chain of unavoidable confusions”, rupturing the intent of the Code to protect the creditors. As per the Code, a financial creditor is obligated to give sufficient evidence to establish a debt. Here, if the definition itself is unclear or paradoxical, it will make the job of a financial creditor tough. Consequently, it will hamper the cases involving genuine disputes of default. Thereby affects the credit cycle badly.

A possible solution

To address this paradox, the author suggests that the first option should be disregarded completely, due to its conflicting interpretation of “time value of money” with other terms (interest, if any), leading to repetition and fallacies. Here, it is argued that the second option is more plausible. And with respect to the second option, there shall be an independent and uniform interpretation of “time value of money”. It might be in the form of having a fixed period for the maturity of a debt or a specific benefit (other than interest) in favor of the creditor. Firstly, mandatory stipulation of a fixed length of debt, as agreed by the parties, will make it easier for the creditor to prove the default and will help the adjudicating authorities to ascertain such alleged default. Since time is of essence under the Code, its reputation will structure the credit process, leading to more clarity in timelines and will help the creditor keep track of the debt. Secondly, if any other benefit is stipulated as “time value of money”, then it will incentivise creditors to give out more accessible debts, however, with this interpretation, it will be better to make these other benefits discretionary to not put debtors under any compulsion.

Conclusion

Currently legal jurisprudence is still under process to give independent meaning to the “time value of money”. It requires consistency and a non-contradictory view of financial debt. The legislature intends to include “time value of value” to create a nexus between the transaction of debt and some later accruing benefit of some kind, to incentivize the credit cycle in commercial borrowings. Here, this benefit cannot be averse to the debtor too as the Code helps the debtor bounce back on its feet so that it can be a going concern. However, what exactly this benefit can be and if it is mandatory or not is still a question of law. To make it more lucid, the authorities must address two concerns- first, to provide a universal meaning and second, to decide its nature as per that meaning. In conclusion, the jurisprudence on financial debt, especially the “time value of money” requires valuable consideration.