Financial debt requirement under the Insolvency Code excludes interest-only claims before principal becomes due

Initiation of CIRP under Section 7 of the Insolvency and Bankruptcy Code requires an existing financial debt and a corresponding default. Although the definition of debt is broad and includes interest where applicable, a claim confined only to accrued interest does not satisfy the statutory threshold if the principal amount has not yet become due and payable. On the terms of the debenture certificate, the principal was still not due, so the interest-only claim was insufficient for Section 7 proceedings. Accordingly, an application based solely on defaulted interest is not maintainable in the absence of a presently due principal debt.

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Issues: Whether a corporate insolvency resolution process under Section 7 of the Insolvency and Bankruptcy Code, 2016 can be initiated solely on the basis of defaulted interest when the principal amount has not yet become due and payable.

Analysis: The debt definition under Section 3(11) of the Insolvency and Bankruptcy Code, 2016 is broad, but initiation of proceedings under Section 7 requires the existence of a financial debt and a corresponding default. Section 5(8) of the Insolvency and Bankruptcy Code, 2016 contemplates a debt along with interest, if any, disbursed against consideration for the time value of money. On the terms of the debenture certificate, the principal amount had not yet fallen due and payable, and the claim was confined only to accrued interest. In the absence of a due principal debt, the claim for interest alone did not satisfy the statutory requirement of financial debt for Section 7 proceedings.

Conclusion: An application under Section 7 of the Insolvency and Bankruptcy Code, 2016 is not maintainable where it is founded only on defaulted interest and the principal amount has not yet become due and payable.

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