While the inclusion of interest amounts in ‘financial debt’, for the purposes of the Insolvency and Bankruptcy Code, 2016 (‘IBC’), is clearly provided for in the IBC, the interest component in the case of operational debt has always been a point of contention.
Definition of the term ‘financial debt’[1] under Section 5(8) of the IBC expressly includes the term ‘interest’ to be a part of the debt that can form a part of the claim against the corporate debtor. However, the definition of the term ‘operational debt’[2] under Section 5(21) of the IBC does not specifically mention the term ‘interest’ to be included as a part of the debt. There appears to be a deliberate difference in the language used for both terms. Accordingly, the understanding between the parties over levy of interest plays a key role while computing the amount of ‘operational debt’.
Let us look at some specific judgments delivered on the aforesaid quandary below.
In the case of Wanbury Ltd. v. Panacea Biotech Ltd. (2017), the National Company Law Tribunal (‘NCLT’), Chandigarh Bench, held that since there is no express agreement between the parties with respect to imposition of interest on delayed of payments, interest cannot be claimed by the operational creditor. Likewise, it was also held in Swastik Enterprises v. Gammon India Limited (2018) that since the applicant had not submitted any substantial document evidencing an agreement for the levy of interest, interest could be claimed. The National Company Law Appellate Tribunal (‘NCLAT’), in the case of SS Polymers v. Kanodia Technoplast Limited (2019), confirmed the stance that interest cannot be claimed as a matter of right when there is no agreement between the parties for the same. Another point worth noting in the same case is that it was also observed by NCLAT that when the principal amount has been paid in full, an application under Section 9 of the IBC cannot be filed just for the claim of interest amount, since it goes against the very principles of the IBC. More recently, the NCLAT, in Rohit Motawat v. Madhu Sharma, Propreitor Hind Chem Corporation & Anr. (2023), has reiterated that the operational creditor cannot claim interest amount in cases where the principal amount has been paid in full by the corporate debtor and the application under Section 9 of the IBC is being filed only for the interest amount. It was also observed by the NCLAT in this latest judgment that interest cannot be claimed when the document evincing the agreement for interest has been signed by a single party (in said case, being invoices issued by the operational creditor to the corporate debtor). This means that it is now necessary for an agreement to be explicitly accepted/signed by both the parties for it to have a validity for payment of interest.
Statutory imposition of interest on operational debt:
There are certain statutes that require imposition of interest. For instance, Section 16[3] of the Micro Small and Medium Enterprises Development Act, 2006 (‘MSMED Act’) directs for mandatory levy of interest on delayed payments by a buyer of goods/services, and the period of delay itself is fixed under said statute after the expiry of which interest is automatically due.
While deciding the fate of operational creditors claiming interest amounts due in terms of the MSMED Act, the NCLT Mumbai in Govind Sales v. Gammon India (2019) held that since the parties did not have a valid agreement stipulating an interest liability, it cannot be claimed by the operational creditor. It should be noted that such a view was taken even though the MSMED Act specifically states that interest shall be paid on delayed payments whether there is an express agreement or not to that effect. Prior to this case, it was also observed in the case of Teknow Consultants & Engineers Pvt. Ltd. v. Bharat Heavy Electricals Limited (2017) by NCLT Delhi that interest cannot be claimed due to lack of proper agreement between the parties, in the same scenario. However, in said case, there was also a contention with the registration status of the operational creditor as an MSME, in response to which the NCLT advised that the correct forum for the claims shall be the Micro and Small Enterprises Facilitation Council (‘MSEFC’). Therefore, the point of law remains unsettled in the absence of confirmation from a higher forum.
Nevertheless, it should not be difficult to gauge from the aforementioned judgments that the lack of an agreement amongst the parties for the liability of interest is an important reason for not awarding the interest amount as claimed by the operational creditor under a Section 9 application. However, what is also equally noteworthy is that irrespective of the stance taken, the authorities have time and again mentioned the fact that the processes under IBC should be availed for insolvency resolution and not for recovery of debt. That is to say that an application only for recovery of an interest amount shall negate the intention of the lawmakers of the IBC and so it is not desired. This gives rise to a proposition that the interest amount alone cannot be claimed as a right, even when the documentation/ agreement between the parties with respect to liability of interest is proper and clear. This also seems to be so even when statutory interest is imposable, such as under the MSMED Act.
[The authors are Partner and Consultant, respectively, in Corporate and M&A practice at Lakshmikumaran & Sridharan Attorneys, Hyderabad]
[1] (8) “financial debt” means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes –
(a) money borrowed against the payment of interest;
……….
[2] (21) “operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the 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
[3] 16. Where any buyer fails to make payment of the amount to the supplier, as required under section 15, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank.
