Facts
Decision


In its recent judgement in Base Realtors Private Limited v Grand Realcon Private Limited,(1) the National Company Law Appellate Tribunal (NCLAT) held that a financial creditor's application under section 7(2) of the Insolvency and Bankruptcy Code 2016 (the Code) is maintainable once the interest is due, even if the principal amount is not due and payable.

Facts

Grand Realcon Private Limited (the respondent) allotted 560,000 debentures of 1,000 rupees each to Base Realtors Private Limited (the appellant) on 13 April 2011. As per the debenture certificate issued on 13 April 2021, the appellant was at liberty to redeem the allotted debentures at any time after one year from the date of their issuance (ie, from 13 April 2012). The debentures carried interest at a coupon rate of 6%, payable at the end of every quarter from 13 April 2021. Accordingly, at the end of quarters ending June, September and December 2021, the interest amounted to over 23,900,000 rupees (approximately £240,000).

However, the respondent failed to pay the appellant the amounts accrued at the end of each quarter, despite the appellant issuing default notices at the end of each quarter. The appellant filed an application under section 7 of the Code before the National Company Law Tribunal (NCLAT), New Delhi (the adjudicating authority) which was dismissed on the ground that the interest amount did not fall within the definition of "financial debt" unless and until the principal amount also became due and payable. Aggrieved, the appellant appealled before the NCLAT.

The question put before the NCLAT was whether an application under section 7 of the Code could be filed and maintained regarding the interest that had became due and payable, without asking for the principal amount that was not yet due and payable.

Submissions by both parties
At the time of arguments, the appellant submitted that an application under section 7 of the code was maintainable despite the interest as, under the provisions of the Code "financial debt"(3) includes any debt with interest disbursed against the consideration for the time value of money. It further referred to Supreme Court's decision in M/s Orator Marketing Pvt Ltd v M/s Samtex Desinz Pvt Ltd(4) wherein the Court held that an interest free loan is a financial debt. Based on this decision, the appellant submitted that the interest in this case, being similar had become due and payable, and thus section 7 of the Code would apply. The respondents vehemently argued that as per the scheme of the Code, financial debt meant a debt along with interest and not interest independently.

Decision

At the outset, the NCLAT referred to the definition of "debt" and "default" contained in sections 2(11) and 3(12) of the Code, respectively. The NCLAT observed that "default" means non-payment of debt when the whole or any part or instalment of the debt has become due and payable but is not paid. "Debt" is defined as liability in respect of a claim towards a financial debt or operational debt and the claim means the right to payment.

Applying the law to the present case, the NCLAT opined that there was no dispute as to the amount of interest that had become due and payable by the corporate debtor to the appellant. This was in view of the condition enumerated in the debenture, which said that the debenture would carry a coupon rate of 6% per annum on face value, plus securities premium on quarterly rests and also in view of section 71(8) of the Act.

The NCLAT also relied on the Supreme Court's judgement in Innovative Industries Ltd v ICICI Bank(5) and held that a default is a condition precedent to maintaining an application under section 7 of the Code. Further, the NCLAT also considered the judgment in Orator Marketing (Supra) and held that an application under section 7 of the Code, in respect of the interest component, was maintainable even without asking for the principal amount that was not yet due and payable.

Applying these principles to the facts and circumstances of the present case, the NCLAT held that as the appellant's application was filed on the basis of the interest being payable without the principal amount being due and payable, it was maintainable. Accordingly, the appeal was allowed.

For further information on this topic please contact Ashmi Mohan or Vatsala Pandey at Clasis Law by telephone (+91 11 4213 0000) or email ([email protected] or [email protected]). The Clasis Law website can be accessed at www.clasislaw.com.

Endnotes

(1) Company Appeal (AT) (Ins) No. 882 of 2022, judgement dated 15November 2022.

(2) Initiation of corporate insolvency resolution process by financial creditor.

(3) Section 5 (8) of the Code.

(4) Civil Appeal No. 2231 of 2021.

(5) (2018) 1 SCC 401.