2025 (5) TMI 658 - AT - IBC

Dismissal of Section 9 application filed by Operational Creditor seeking admission of Corporate Debtor into the rigours of Corporate Insolvency Resolution Process - dismissal of petition by holding that CIRP could not be initiated against the Corporate Debtor since the principal amount had already been paid by the Corporate Debtor and therefore Section 9 petition is non-maintainable for interest component alone - HELD THAT - In the present case the Respondent not having disputed the interest stipulation in the invoice either at the time of placing orders or upon receipt of goods must be construed as Appellant s acceptance of the entire debt including interest. Hence the total operational debt including interest accrued at 24% p.a. surpasses the Rs. 1 crore threshold under Section 4 of the IBC rendering their Section 9 petition fully maintainable. Stressing that the principal amount and interest on delayed payment as provided for in the invoice stipulation cannot be bifurcated the Appellant has relied on the judgment of this Tribunal in Prashat Agarwal 2022 (7) TMI 835 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL PRINCIPAL BENCH wherein it was held that when interest on delayed payment is clearly stipulated in the invoice this entitles the supplier to right to payment under Section 3(6) of IBC and interest amount would form part of the debt under Section 3(11) of IBC. Since there has been no amendment of the Agreement the terms agreed between the parties in the Supply Agreement prevail over unilateral invoices. Even though invoices can play a crucial role in defining the rights and obligations between parties however there has to be an element of mutual consent which can be discernible from conduct. When the ingredient of levy of interest on delayed payment is absent in the written contract stipulation of interest payment in invoices can override the written contract only if there is mutual consent and mutual understanding between the parties in this regard which in the present case has not been demonstrated by conduct and practice. There is no evidence of payment of interest by the Respondent which has been substantiated by the Appellant - the Adjudicating Authority agreed upon that unilaterally generated invoices signed by only one party cannot overrun or recast the terms of bi-partite agreements and create binding obligations on the other party to pay interest. The preambular objective of the IBC being insolvency resolution has been oft emphasised by the Hon ble Supreme Court in a catena of judgements. The provisions of IBC cannot be turned into a debt recovery proceeding. Hence the Adjudicating Authority has not committed any infirmity in not allowing the CIRP of the Corporate Debtor to be initiated solely on the basis of the claim of the contested and unsubstantiated interest component. The provisions of IBC cannot be turned into a debt-recovery proceedings and to commend any such course of action would tantamount to pushing the Corporate Debtor to face the perils of corporate death instead of being rejuvenated and revived. We also notice that the Appellant has relied on the provisions of other laws like MSME Act or Interest Act to justify their claim of interest payment. Conclusion - The Adjudicating Authority s dismissal of the Section 9 petition upheld finding no legally enforceable unpaid operational debt to trigger CIRP. There are no merit in the Appeal - appeal dismissed.

Summary

The core legal questions considered by the Tribunal in this appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016 ("IBC") were:

1. Whether the Corporate Insolvency Resolution Process ("CIRP") can be initiated solely on the basis of an unpaid interest component of an operational debt, after the principal amount has been fully paid by the Corporate Debtor.

2. Whether the interest claimed on delayed payments forms part of the operational debt under the IBC and whether it can be aggregated with the principal amount to meet the threshold limit prescribed under Section 4 of the IBC.

3. Whether unilateral invoices containing interest clauses, not incorporated in the underlying Supply Agreement and not acknowledged or accepted by the Corporate Debtor, can create a binding obligation to pay interest on delayed payments.

4. Whether the provisions of other statutes such as the Micro, Small and Medium Enterprises Development Act, 2006 ("MSME Act") or the Interest Act, 1978, can be invoked before the Adjudicating Authority or Appellate Tribunal to enforce interest claims in CIRP proceedings.

5. Whether pursuing CIRP proceedings solely for recovery of disputed interest amounts, after payment of principal, constitutes an abuse or misuse of the IBC process.

Issue-wise Detailed Analysis:

Issue 1 & 2: Maintainability of CIRP Petition Solely on Interest Component and Aggregation of Interest with Principal for Threshold under IBC

The legal framework under Section 4 of the IBC requires that the operational debt must meet a minimum threshold (Rs. 1 crore in this case) for initiating CIRP. Section 3(6) defines "operational debt" to include any debt in respect of the provision of goods or services including interest payable thereon. The Appellant argued that the total operational debt must be computed by aggregating both principal and interest components, relying on precedents where interest stipulated in invoices was held to be part of operational debt. Regulation 7(2)(b)(ii) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 ("CIRP Regulations") recognizes invoices as sufficient proof of operational debt.

The Appellant relied on judgments of this Tribunal which held that interest stipulated in invoices forms part of operational debt and cannot be bifurcated from principal for the purpose of determining maintainability of Section 9 petitions.

However, the Tribunal examined the underlying Supply Agreement dated 09.10.2018 governing the parties' relationship. The relevant clauses on payment terms and Schedule-D did not provide for payment of interest on delayed payments. There was no evidence of any amendment or mutual consent to include interest payment terms in the contract. The reconciliation statements also did not mention interest. The Tribunal held that in absence of a contractual provision or mutual consent, unilateral invoices containing interest claims, not acknowledged or accepted by the Corporate Debtor, cannot override the terms of a bi-partite agreement.

The Tribunal referred to a prior decision of the Tribunal which held that if no interest is payable under the contract, only the principal amount constitutes the operational debt for Section 9 proceedings. The interest claim, if disputed, must be pursued before a competent civil court and cannot form the basis for initiating CIRP.

Further, the Tribunal noted that the principal amount was paid after reconciliation and the Appellant's insistence on the same interest amount despite reduction in principal lacked credible explanation, suggesting an artificial inflation of the claim to meet the threshold.

Thus, the Tribunal concluded that the Section 9 petition was rightly dismissed as non-maintainable since the principal was paid and the interest claim was unsubstantiated and disputed.

Issue 3: Binding Nature of Unilateral Invoices Containing Interest Clauses

The Appellant contended that the interest clause in invoices, regularly issued and acted upon by the Respondent without protest, constituted a valid contractual term under Regulation 7(2)(b)(ii) of CIRP Regulations and relevant case law. The Respondent denied any contractual basis for interest, emphasizing the absence of any clause in the Supply Agreement and lack of mutual acceptance of interest terms.

The Tribunal emphasized that invoices, while relevant, cannot override the terms of a written contract unless there is evidence of mutual consent or conduct indicating acceptance of new terms. The absence of any prior payment or acknowledgment of interest by the Respondent and the absence of counter-signature on invoices negated the unilateral imposition of interest. The Tribunal relied on the principle that contractual terms prevail over unilateral documents and that mutual consent is essential to create binding obligations.

Issue 4: Applicability of MSME Act and Interest Act in CIRP Proceedings

The Appellant invoked Sections 15 and 16 of the MSME Act which mandate payment of interest on delayed payments to MSMEs and also relied on the Interest Act, 1978, to justify the interest claim. The Tribunal observed that while these statutes may provide substantive rights, the Adjudicating Authority and the Appellate Tribunal under the IBC are not the appropriate forums to adjudicate such claims. The IBC process is focused on insolvency resolution and not on determination of contractual or statutory interest claims which are to be adjudicated by civil courts or other competent forums.

Issue 5: Abuse of IBC Process by Pursuing CIRP Solely for Interest Recovery

The Respondent argued that the appeal was a misuse of the IBC provisions since the principal amount was fully paid and only a disputed interest claim remained. The Tribunal agreed that IBC is not a debt recovery mechanism but a tool for insolvency resolution. Initiating CIRP solely for recovery of disputed interest amounts, especially after full payment of principal, amounts to abuse of process and malafide intent. The Tribunal relied on prior decisions holding that once undisputed principal is paid, Section 9 petitions based solely on disputed interest claims are not maintainable and should be pursued before civil courts.

Significant Holdings:

"If in terms of any agreement interest is payable to the Operational or Financial Creditor then debt will include interest, otherwise, the principal amount is to be treated as the debt which is the liability in respect of the claim which can be made from the Corporate Debtor."

"In the absence of any Agreement, no such amount [interest] can be claimed."

"Unilaterally generated invoices signed by only one party cannot overrun or recast the terms of bi-partite agreements and create binding obligations on the other party to pay interest."

"The provisions of IBC cannot be turned into a debt recovery proceeding."

"Initiation of Corporate Insolvency Resolution Process is not the answer for disputed interest claims after payment of principal."

The Tribunal established the core principle that operational debt under IBC includes interest only if it is contractually agreed or mutually accepted. Mere unilateral invoices containing interest claims without contractual basis or acceptance do not constitute operational debt for triggering CIRP. Once the undisputed principal is paid, CIRP cannot be initiated solely on the basis of disputed interest claims. The IBC process is not a substitute for civil recovery proceedings and cannot be misused for enforcing disputed monetary claims.

Accordingly, the Tribunal upheld the Adjudicating Authority's dismissal of the Section 9 petition, finding no legally enforceable unpaid operational debt to trigger CIRP. The appeal was dismissed with no costs.