In the recent decision of Base Realtors Private Limited v. Grand Realcon Private Limited, the National Company Law Appellate Tribunal, New Delhi (“NCLAT”) has upheld the maintainability of an application filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) relating to the component of interest due and payable, without asking for the principal amount which has not yet become due and payable.
Debt: On April 31, 2011, the Grand Realcon Private Limited (“Respondent”) allotted redeemable optionally convertible debentures to Base Realtors Private Limited (“Appellant”) with a coupon rate of 6% payable on face value, plus premium on securities after end of each quarter. The debentures had the maturity date of March 31, 2026. As the debenture certificate was issued on April 13, 2021, the debentures could be redeemed after expiry of one year from the said date and interest was to be calculated from the said date.
Default: At the end of quarter ending June, September and December 2021, interest aggregating to an amount over INR 2,39,00,000 (Indian Rupees two crores thirty nine lakhs) accrued in favour of the Appellant. However, the Respondent did not pay the Appellant the amounts accruing at the end of each quarter, despite the Appellant issuing default notices at the end of each quarter.
Application under Section 7 of the IBC: The Appellant filed an application under Section 7 of the IBC before NCLT, Delhi-V (“NCLT”) in respect of the accrued interest of 3 (three) quarters ("Application”). The NCLT dismissed the Application on the ground that only the interest amount would not fall within the definition of “financial debt” until and unless principal amount has also become due and payable. Aggrieved, the Appellant filed an appeal before the NCLAT.
Whether an application under Section 7 of the IBC can be maintained in respect of only the component of interest which became due and payable, without asking for the principal amount which has not yet become due and payable.
NCLAT: Findings and Rationale
The NCLAT set aside the order of the NCLT and answered the issue in the affirmative by holding that the application filed under Section 7 of the IBC could be maintained relating to the component of interest which became due and payable, without asking for the principal amount which has not yet become due and payable. The rationale for the decision was:
- Relying on Innovative Industries Ltd. v. ICICI Bank and Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd. to hold that default is the trigger and condition precedent to maintaining an application under Section 7 of the IBC . This reasoning was further elaborated by referring to the definition of “default ” under Section 3(12) of the IBC and the term “debt” used therein and corresponding it to the facts of the case.
- The debenture is a debt borrowed by the Appellant at a fixed rate of interest. There is no dispute that interest became due and payable by the Respondent to the Appellant at the end of each quarter, and that the Respondent defaulted in paying this interest to the Appellant.
- While referring to the definition of “financial debt” and “financial creditor”, the NCLAT was faced with the Respondent’s objection that financial debt includes debt along with interest and not the interest independently. While the judgement doesn’t specifically deal with this argument, it relies on the decision of Orator Marketing (supra) to import the expansive definition of “default” and “financial debt” under the IBC which includes any amount raised under any other transaction, having the commercial effect of borrowing (Section 5(8)(f) of the IBC).
After Orator Marketing (supra) recognised “financial debt” sans interest, this NCLAT judgment impliedly expanded the definition of “financial debt” to also include cases where only interest is payable, even if principal amount has not yet become due or payable. This expands the scope of Section 7 IBC proceedings wherein the adjudicating authority can also admit a corporate debtor into CIRP if the financial creditor can establish that there is a default of interest above INR 1,00,00,000 (Indian Rupees one crore) (threshold under Section 4 of the IBC), due and payable by the corporate debtor to the financial creditor.