One of the biggest changes brought in by the Insolvency and Bankruptcy Code, 2016 (“Code”) was the demarcation between treatment of interest vis-à-vis financial debt and operational debt. Over time, Courts have interpreted the Code with the aim to strengthen the foundation and resolve uncertainties. One such exercise, which has greatly impacted the insolvency regime, is the inclusion of interest in operational debt.
PHASE 1 – EXCLUSION OF INTEREST
“Operational Debt” is defined as “claim in respect of the provisions of goods or services including employment of a debt in respect of payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority”. This stands in contrast to the definition of “financial debt” which includes the phrase “debt along with interest...”.
This difference was noted by the National Company Law Tribunal (“NCLT”), Chandigarh Bench in the case of M/s. Wanbury Limited v. Panacea Biotech Limited, 2017 SCC OnLine NCLT 475 observing that “There is a marked difference between the definition of term ‘financial debt’ and the ‘operational debt’. Under section 5(8) the term ‘financial debt’ means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and that is an inclusive definition. In the definition of the term ‘operational debt’ under Section 5(21) the word ‘interest’ has not been mentioned”.
This led to Corporate Debtors claiming that interest cannot be added to principal debt to meet the minimum threshold for initiating proceedings under the Code.
PHASE 2 – INCLUSION OF INTEREST
NCLT, New Delhi Bench in CBRE South Asia Private Limited v. United Concepts and Solutions Private Limited, 2022 SCC OnLine NCLT 36, while examining the issue of inclusion of interest to meet the minimum threshold held that “we are of the view that the interest amount cannot be clubbed with the Principal amount of debt to arrive at the minimum threshold of Rs. 1 Crore for complying with the provision of Section 4 of IBC, 2016”. Accordingly, NCLT rejected the application under Section 9.
The decision was promptly set aside by the Appellate Tribunal (“NCLAT”) as being erroneous. NCLAT relied upon its previous judgement in the case of Prashant Agarwal v. Vikash Parasrampuria, 2022 SCC OnLine NCLAT 3781, wherein it had observed that the total amount for maintainability of a claim would include principal and interest on delayed payment.
PHASE 3 – EXCEPTIONS TO THE RULE
After Prashant Agarwal, Courts carved out various exceptions to the rule that operational debt includes principal and interest.
The first exception is where the agreement for provision of goods or services does not contemplate interest on delayed payment. A corollary to this are cases where interest has been charged basis invoices which are unsigned or raised without consent of corporate debtors.
In the case of S.S. Polymers v. Kanodia Technoplast Limited, Company Appeal (AT) (Ins.) No. 1227 of 2019, the operational creditor relied upon invoices to claim that interest was due and payable by the corporate debtor. NCLAT rejected the argument while observing that the invoices were one-sided, having been raised without the consent of the corporate debtor. The observation was further expounded upon in the case of Rohit Motawat v. Madhu Sharma, Company Appeal (AT) (Ins) No. 1152 of 2022.
The second exception is that a petition solely for the recovery of interest is not maintainable and interest on delayed payment, if any, must be decided by a competent court. In Krishna Enterprises v. Gammon India Limited, 2018 SCC OnLine NCLAT 360, interest was claimed on delayed payment, without any contractual term to the effect. The NCLAT held that “If for delayed payment Appellant(s) claim any interest, it will be open for them to move before a court of competent jurisdiction, but initiation of Corporate Insolvency Resolution Process is not the answer”.
PHASE 4 – SOLVENT CORPORATE DEBTOR AND MALICIOUS PROCEEDINGS
Company Courts in India have afforded relief to corporate debtors by holding that applications under Section 9 which are filed for the sole purpose of recovery of interest cannot be considered as applications filed initiating corporate insolvency resolution process (“CIRP”) against corporate debtors. Such proceedings are against the letter and spirit of the Code, which is not a tool for recovery.
In numerous proceedings over the years, including in the case of SBF Pharma v. Gujarat Liqui Pharmacapts Private Limited, 2019 SCC OnLine NCLAT 1440, corporate debtors have, during the pendency of the proceedings, paid the principal debt while disputing their liability to pay the interest. In such cases, the NCLAT has held that the corporate debtor cannot be said to be insolvent as it is able to pay the claim amount and proceedings which are pursued for the sole purpose of recovery of interest are malicious.
The exceptions read into treatment and claim of interest for the purposes of Section 9 of the Code are a welcome step from the point of view of corporate debtors who have been dragged into the ambit of the Code to merely recover disputed interest. It also ensures that solvent entities which can meet their obligations are not pushed into CIRP, thereby having a negative impact on the corporate ecosystem.
Additionally, it serves as a caution to operational creditors to ensure that they approach the Courts with the correct intentions i.e., in line with the spirit and letter of the Code.
However, such distinction creates an unfair treatment between class of creditors. The Supreme Court in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta & Ors Civil Appeal No. 8766-67 of 2019 held that equitable principles for financial & operation creditors is not applicable since they are not similarly placed. However, the Courts cannot overlook the BLRC Report and the judgement of Swiss Ribbons (P) Ltd. v. UOI (2019) 4 SCC 17 which espouse the cause of operational creditors being given the same treatment as financial creditors in admission of CIRP against Corporate Debtors.