2022 (6) TMI 53 - Tri - Insolvency and Bankruptcy

Dismissal of CIRP Petition Based on Unpaid Interest Alone Contradicting Insolvency Law Objectives

Saraf Chits Private Limited and VKSS International Private Limited Versus KAD Housing Private Limited

The Tribunal dismissed the petition to initiate Corporate Insolvency Resolution Process (CIRP) against a Corporate Debtor based solely on unpaid interest ... Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of interest - principal amount is paid - Financial Creditors - existence of debt and dispute or not - Whether the CIRP can be initiated / triggered solely on the basis of the un-paid amount of interest when the entire principal amount of debt has been discharged by the Corporate Debtor? - HELD THAT:- The interest is not included in the term “debt” per se. Rather, the “interest” can be claimed as “financial debt” only if such debt exists. The “interest” component alone cannot be claimed or pursued, in absence of the debt, to trigger a CIR process against the corporate Debtor. Further, the application pursued for realization of the interest amount alone is against the intent of the IBC, 2016. It is concluded that the CIRP against a Corporate Debtor cannot be initiated/triggered solely on the basis of the un-paid amount of interest where the entire principal amount has already been discharged by the Corporate Debtor. Petition dismissed. Issues:1. Initiation of Corporate Insolvency process under Section 7 of the Insolvency and Bankruptcy Code, 2016 against a Corporate Debtor.2. Adjudication on whether the Corporate Insolvency Resolution Process (CIRP) can be initiated based solely on the unpaid interest amount when the principal debt has been paid by the Corporate Debtor.Detailed Analysis:Issue 1: The Applicants, financial creditors, filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 seeking to initiate the Corporate Insolvency process against the Corporate Debtor, a company incorporated under the Companies Act, 1956. The application detailed the unpaid financial debt amounting to Rs.1,76,04,484 with a default date in July 2019. The Authorized Share Capital and Paid-up Share Capital of the Corporate Debtor were also specified.Issue 2: During the hearing, it was revealed that the principal debt of Rs. 1.5 Crore had been paid by the Corporate Debtor, leaving only Rs. 64 lakh towards the interest component. The question arose whether CIRP could be triggered based solely on the unpaid interest amount when the principal debt had been settled. The definition of 'financial debt' under Section 5(8) of the IBC, 2016 was referred to, emphasizing that interest can be claimed as financial debt only if the debt exists. The Tribunal analyzed the definitions of 'debt' and 'claim' under Sections 3(11) and 3(6) of the IBC, respectively, to determine the scope of the term 'debt.'The Tribunal cited a judgment by the NCLAT, highlighting that pursuing an application for the realization of interest alone, after the principal debt has been paid, goes against the intent of the IBC, 2016. It was concluded that initiating CIRP solely on the basis of unpaid interest when the principal debt has been discharged is not permissible. Therefore, the petition was dismissed based on this analysis and interpretation of the relevant provisions and precedents.In conclusion, the Tribunal's decision clarified the limitations on initiating CIRP based on unpaid interest when the principal debt has been settled, emphasizing the importance of aligning with the objectives and principles of the Insolvency and Bankruptcy Code, 2016.