Is accumulated interest a part of operational debt in Indian Insolvency laws?

Posted On - 8 August, 2022 • By - Souvik Ganguly

A key concern in respect of the Insolvency and Bankruptcy Code, 2016 (Code) since its inception has been the differential treatment of operational creditors and financial creditors. For context, financial creditors have a purely financial arrangement with the corporate debtor, while operational creditors are those who are owed money by the corporate debtor for the provision of goods supplied or services rendered. One of the more recent issues that has been considered by India’s insolvency courts is whether ‘interest’ can be clubbed with ‘principal operational debt’ to satisfy the minimum threshold of INR 10 million for initiating insolvency proceedings against the corporate debtor.

Divergent views have been taken by the various benches of the insolvency courts, i.e., the National Company Law Tribunals (NCLT). Recently, the appellate insolvency tribunal, i.e., the National Company Law Appellate Tribunal (NCLAT) in the matter of Mr. Prashant Agarwal v. Vikash Parasrampuria (Prashant Agarwal Judgment) has provided much needed clarity on the issue of whether the interest component can be included with the principal debt to arrive at the minimum threshold of INR 10 million to invoke the provisions of the Code.

Brief Facts

Mr. Vikash Parasrampuria (Operational Creditor), through his proprietorship firm, supplied different types of yarns to Bombay Rayons Fashions Ltd. (Corporate Debtor). For supply of yarn, the Operational Creditor raised certain invoices, which were either not paid by the Corporate Debtor, or partly paid or paid with a substantial delay. All these invoices had an ‘interest clause’ stipulating 18% interest on delayed payment. This interest clause was never disputed by the Corporate Debtor. On account of failure of the Corporate Debtor to make payments, the Operational Creditor approached the NCLT seeking insolvency of the Corporate Debtor.

It should be noted that for filing an application for initiating insolvency of a debtor under the Code, the default should be at least INR 10 million. In the present case, the principal debt was INR 9,787,220 and the accumulated interest was INR 6,300,618, which resulted in the aggregate outstanding default amount to be INR. 16,087,838.

The NCLT initiated insolvency of the Corporate Debtor by holding that the total default amount exceeded INR 10 million. The NCLT’s order was challenged by the Corporate Debtor in the NCLAT, the appellate tribunal, on the ground that the accumulated interest cannot be clubbed with principal debt to arrive at the total outstanding debt of the Corporate Debtor vis-à-vis the Operational Creditor.

Findings of the NCLAT

The NCLAT noted that under the Code, ‘debt’ is defined as “a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt”. Further, ‘claim’ under the Code included a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured.

The NCLAT held that, since the invoice had clearly mentioned that interest will be charged on delayed payment, the Operational Creditor has a ‘right to payment’ of the accumulated interest amount. In other words, such interest will form part of claim and consequently is a ‘debt’ under the Code. Therefore, in the present case as there was mutual agreement between parties to charge interest for delayed payment, the accumulated interest amount was a part of the operational debt. Therefore, the principal debt and the accumulated interest amount could be clubbed together to meet the minimum threshold of INR 10 million to invoke the provisions of the Code. Accordingly, the NCLAT dismissed the appeal.

Our thoughts

It is worth noting that the NCLAT, in a series of judgments, has refused to initiate insolvency of the corporate debtor, where the application had been filed by the operational creditor merely on the basis of accumulated interest amount. For example, in SS Polymers v. Kanodia Technoplast Ltd., as well as in SBF Pharma v. Gujarat Liqui Pharmacaps Pvt. Ltd, the NCLAT held that an application by an operational creditor for recovering only the interest amount, was against the principles of the Code and evidenced malicious intent of the operational creditor.

On the other hand, in Steel India v. Theme Developers Pvt. Ltd., the NCLAT held that accumulated interest amount can be claimed only if mutually agreed by the parties. This view has also been subsequently followed by various benches of the NCLT.

Accordingly, we sincerely hope that the Prashant Agarwal Judgment will settle the law on clubbing accumulated interest amount with principal debt due for computing the minimum threshold of INR 10 million, if there is an agreement between the parties of interest being chargeable for delayed payments. However, it may happen that stakeholders may continue to dispute the findings of the Prashant Agarwal Judgment unless the same is settled by Supreme Court of India or the Code is amended unambiguously to settle the law on accumulated interest and claim amounts. In view of the above, it is recommended that in the interest of efficient implementation of the Code and saving the precious time of our insolvency courts, this issue be settled at the earliest by an amendment to the Code.

Authors: Souvik Ganguly, Altamash Qureshi and Karan Vin

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