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CORPORATE INSOLVENCY RESOLUTION PROCESS CANNOT BE INITIATED ONLY FOR INTEREST DUE

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CORPORATE INSOLVENCY RESOLUTION PROCESS CANNOT BE INITIATED ONLY FOR INTEREST DUE
Mr. M. GOVINDARAJAN By: Mr. M. GOVINDARAJAN
June 3, 2022
All Articles by: Mr. M. GOVINDARAJAN       View Profile
  • Contents

Debt

Section 3(11) of the Insolvency and Bankruptcy Code, 2016 defines the term ‘debt’ as a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.

Section 3(12) defines the term ‘default’ as non-payment of debt when whole or any part or installment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be.

Section 5(8) of the Code defines the expression ‘financial debt’ as a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes-

  • money borrowed against the payment of interest;
  • any amount raised by acceptance under any acceptance credit facility or its de-materialized equivalent;
  • any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;
  • the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;
  • receivables sold or discounted other than any receivables sold on non-recourse basis;
  • any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;
  • any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;
  •  any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;
  • the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause.

Corporate Insolvency Resolution Process

The Code prescribes the procedure for the initiation of corporate insolvency resolution process by a financial creditor under section 7 of the Code and by the operational creditor under section 9 of the Code.  The operational creditor can file application only after the operational creditor issues notice to the corporate debtor along with the invoice for making payment.  If the corporate debtor did not pay or give reply on the notice within 10 days from the date of receipt of the notice, the operational creditor may initiate an application under Section 9.

Issue

The issue to be discussed is as to whether the corporate insolvency resolution process can be initiated against the corporate debtor only for the interest due, once the principal debt has been discharged by the corporate debtor with reference to decided case laws.

Case laws

In S.S. POLYMERS VERSUS KANODIA TECHNOPLAST LIMITED [2019 (11) TMI 1428 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI], the appellant filed an application under Section 9 of the Code for initiation of Corporate Insolvency Resolution Process against Kanodia Technoplast Limited, the Corporate Debtor. The Adjudicating Authority New Delhi, rejected the application on the ground that there is no debt payable and there is no default.  The Adjudicating Authority observed that that a sum of Rs.25,00,000/- out of Rs.32,71,800/- was paid to the Appellant by 31.12.2019 through RTGS(s). The remaining amount of Rs.7,71,800/- was also paid by Corporate Debtor to the Applicant by 17.01.2019 through NEFT(s). The said amounts were paid before the admission of the application under Section 9 of the Code.  The appellant relied on ‘Invoices’ to suggest that in the ‘Invoices’, the claim was raised for payment of interest.  The Adjudicating Authority did not accept such submission as they were one side Invoices raised without any consent of the Corporate Debtor.  The Adjudicating Authority observed that in the absence of any Agreement, no such amount can be claimed.

The Adjudicating Authority held that before the admission of an application under Section 9 of the Code, the Corporate Debtor paid the total debt. The application was pursued for realization of the interest amount, which is against the principle of the Code, as it should be treated to be an application pursued by the Applicant with malicious intent (to realize only Interest) for any purpose other than for the Resolution of Insolvency, or Liquidation of the ‘Corporate Debtor’ and which is barred in view of Section 65 of the Code.

The appellant filed an appeal before the National Company Law Appellate Tribunal.  Before the Appellate Tribunal the appellant contended that the Adjudicating Authority rejected the application on wrong presumption that there is no Agreement between the parties.  The appellant further contended that for the purpose of application under Section 9 of the Code, it is not necessary to rely on any Agreement, if there is debt payable and default and any record can be relied upon in terms of Part-IV of Form 5.

The Appellate Tribunal held that there is no merit in the appeal and therefore dismissed the appeal.

In SARAF CHITS PRIVATE LIMITED AND VKSS INTERNATIONAL PRIVATE LIMITED VERSUS KAD HOUSING PRIVATE LIMITED [2022 (6) TMI 53 - NATIONAL COMPANY LAW TRIBUNAL , NEW DELHI BENCH] , the applicant filed an application under section 7 of the Code for the initiation of corporate insolvency resolution process against the respondent KAD Housing Private Limited, the corporate debtor.  The applicant granted loan to the corporate debtor on 14.05.2019, 15.05.2019, 18.05.2019 and 19.05.2019 to the tune of Rs.1.5 crores.  Since the same has not been paid by the corporate debtor the applicant filed the present application against the corporate debtor for initiation of corporate insolvency resolution process.  The applicant also claimed that the debtor has not paid the interest for the loan granted to the corporate debtor to the tune of Rs.26,04,484/-.  Thus the total claim of the applicant is Rs.1,76,04,484/-. 

During the hearing held on 08.12.2021, the applicant informed the Adjudicating Authority that the corporate debtor paid Rs.1.50 crores and the interest to the tune of Rs.64 lakhs is outstanding.  Since the said amount is less than Rs.1 crore which is the monetary limit of default for filing of application for initiation of corporate insolvency resolution process.  The applicant has to convince the Adjudicating Authority for the maintainability of the application.

The applicant, during the hearing held on 19.04.2022, contended that the corporate debtor paid the amount only during the pending of the application for admission of corporate insolvency resolution process by the Adjudicating Authority.  As such the application is maintainable before the Adjudicating Authority.  The applicant contended that the term ‘financial debt’ as defined under section 5(8) of the Code, includes the interest component also.

The corporate debtor did not file any reply or written submissions for the application filed by the applicant before the Adjudicating Authority.  During the personal hearing the corporate debtor contended that since the principal amount has been paid to the applicant the application is liable to be dismissed. 

The Adjudicating Authority heard the submissions put forth by the parties to the present application.  The Adjudicating Authority noted that the principal amount has been discharged.  At this juncture the Adjudicating Authority has taken up the question to be considered – Whether the corporate insolvency resolution process can be initiated/triggered solely only the basis of unpaid amount of interest when the entire principal amount of debt has been discharged by the corporate debtor. 

The Adjudicating Authority analyzed the definition of the terms ‘debt’ under section 3(11) of the Code and ‘financial debt’ under section 5(8) of the Code and also the term ‘claim’ under section 3(6) of the Code

From the definition of the above terms, the Adjudicating Authority observed that the interest is not included in the term ‘debt’ but the interest can be claimed as financial debt only if such debt exists.  The Adjudicating Authority relied on the judgment in ‘S.S. Polymers v. V. Kanodia Technoplast Limited’ (supra).  The Adjudicating Authority held that the ‘interest’ claim cannot be claimed or pursued in absence of debt to trigger a corporate insolvency resolution process against the corporate debtor.  The Adjudicating Authority further observed that the application pursued for the realization of interest amount alone which is against the intent of the Code.

The Adjudicating Authority held that the corporate insolvency resolution process cannot be initiated/triggered solely on the basis of unpaid amount of interest where the entire principal amount has already been discharged by the corporate debtor.

Conclusion

From the above discussion it can be inferred that no corporate insolvency resolution process can be initiated only for interest due, against the corporate debtor.  Section 5(8) of the Code defines the expression of ‘financial debt’ as a debt along with interest, if any, which is disbursed against the consideration for the time value of money.  Therefore the financial debt along with interest can be considered for the purpose of initiating corporate insolvency resolution process.  The said definition does not indicate the ‘interest’ alone as financial debt.  Therefore it was correctly held by the Authorities that corporate insolvency resolution process cannot be initiated only for interest due. 

 

By: Mr. M. GOVINDARAJAN - June 3, 2022

 

 

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