Will ‘interest’ be included in the definition of a ‘debt’ under the IBC? NCLT answers

Varun Marwah

The Chandigarh Bench of the NCLT has held that ‘interest’ would not be included in the definition of ‘debt’ insofar as debt owed to an operational creditor is concerned under the provisions of the Insolvency and Bankruptcy Code, 2016 (Code).

Wanbury Ltd. (Creditor) had filed a winding up petition in the Punjab & Haryana High Court in 2014. However, the proceedings were transferred to the NCLT, in March 2017, in accordance with Rule 5 of the Companies (Transfer of pending proceedings) Rules, 2016.

The outstanding debt that remained by Panacea Biotech Ltd. (Debtor) to the Creditor after making part payments, following the winding up petition, had come down to ₹20,85,273 plus interest of ₹21,36,518.

The Creditor, being an operational creditor, is deemed to have filed an application u/s 9 of the Code

The Debtor, made the principal payment of ₹20,85,273 in two cheques which were accepted by the creditor without prejudice to the right for pressing for interest.

Therefore, the question that came up before the Bench was, whether the claim of interest falls within the term ‘debt’ which the Debtor is liable to pay, failing which the Creditor is entitled to an order of admission in terms of section 9 of the Code. An order of admission being, the initiation of an corporate insolvency resolution process.

To answer this question, NCLT considered the relevant definitions in the Code, as well as the factual position in the given case –

Legislative factors

As per section 3(11) of the Code,

A liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.

As per Section 5(21) of the Code,

Operational debt means a claim in respect of the provisions of goods and services including employment or a debt in respect of the repayment of the dues arising under any law for the time being in force and payable to the central government or state government or any local authority.

And as per section 5(8) of the Code,

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.

Notably, the word ‘interest’ has been omitted in the definition of operational debt. This is the first factor which tilts towards non-inclusion of interest in the definition of the term debt.

Factual consideration

In this case, the conduct of the Debtors was a strong factor as well while deciding if interest needs to be included in the definition of debt:

1) The amount paid to the Creditors from time to time was being regularly adjusted towards the principal only and the interest was accumulated for the amount claimed by the petitioners;

2) Even the invoices filed along with the winding up petition, did not contain any clause of payment of interest;

3) The Creditors had also assured full cooperation to the Debtor that, no provision for payment of ‘interest’ in case of delay in payment would be made.

The counsel appearing for the Creditors vehemently argued that interest can be determined by the NCLT and that petitioner is entitled to interest in accordance with section 61 of Sales of Goods Act and section 3 of Interest Act.

However, NCLT made note that the intention of legislature, under the Code, wasn’t to make NCLT a forum for determining rate of interest and grant time to pay.

The task is to accept or reject within 14 days.

Considering the legislative and factual position, the NCLT did not initiate corporate insolvency resolution process.

While the factual position in this case supported NCLT’s decision in not including interest in the definition of a debt, it’s unclear if a neutral factual position would elicit a similar interpretation.

C.S Chauhan represented the Creditors and Atul V. Sood represented the Debtors.

(Read the order)

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