NCLAT rejects Section 9 IBC application over Rs 6.13 crore citing unenforceable invoice interest claims

The NCLAT set aside a tribunal order regarding a Section 9 IBC application involving Rs. 6,13,48,161.98, comprising Rs. 4,97,22,461.16 principal and Rs. 1,16,25,700.82 interest. The appellate tribunal held that interest claims based solely on invoice provisions without formal agreement are unenforceable under IBC. The invoice clause stating "interest will be charged @ 12% or as per agreed terms" was deemed vague and unenforceable as no agreed terms existed. The tribunal distinguished the case from Prashat Agarwal, noting the invoice lacked specific payment periods and contractual basis for interest claims.

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ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

• Whether the application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) is maintainable solely for the recovery of interest when the principal amount has already been paid.
• Whether the interest claimed by the Operational Creditor (OC) is enforceable based on the boilerplate provision in the invoices, in the absence of any express agreement between the parties regarding the payment of interest.
• Whether the Tribunal erred in admitting the application under Section 9 of the IBC based on the claim of interest without a formal agreement.

ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents:

The legal framework involves Section 9 of the IBC, which allows an operational creditor to initiate a corporate insolvency resolution process against a corporate debtor for unpaid operational debts. The precedents considered include decisions from the Hon'ble Supreme Court and other appellate decisions regarding the enforceability of interest claims based on invoice provisions.

Court's interpretation and reasoning:

The Court examined whether the claim for interest constituted an operational debt under the IBC. It analyzed the provision in the invoice that stipulated interest on delayed payments and compared it with precedents where similar clauses were deemed unenforceable without an express agreement.

Key evidence and findings:

The evidence included the invoices issued by the OC, which contained a clause for charging interest at 12% on delayed payments. However, there was no accompanying agreement or documentation that confirmed the corporate debtor's (CD) acceptance of this interest provision. The CD had already paid the principal amount, and its ledger reflected a nil balance for the principal debt.

Application of law to facts:

The Court applied the principles from previous cases, such as Comet Performance Chemicals Pvt. Ltd. and Rohit Motawat, which held that interest claims without a formal agreement are not enforceable under the IBC. The Court noted that the OC's claim for interest was based solely on an invoice provision without any supporting agreement or acknowledgment from the CD.

Treatment of competing arguments:

The Appellant argued that the interest clause was a boilerplate provision that was never acknowledged by the CD, and no documentation supported the OC's claim for interest. The OC contended that the payment should be apportioned first towards interest based on the invoice clause and relied on precedents supporting such apportionment. However, the Court found that the invoice clause was vague and lacked specificity regarding the payment period and terms.

Conclusions:

The Court concluded that the application under Section 9 of the IBC was not maintainable solely for the recovery of interest, especially when the principal amount had been paid and there was no express agreement for interest payment.

SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning:

The Court stated, "the application for interest was not maintainable as the spirit of the legislation of the Code is for resolution of debt and not for recovery."

Core principles established:

• Interest claims based solely on invoice provisions without a formal agreement or acknowledgment are not enforceable under the IBC.
• The IBC is intended for the resolution of debts, not for the recovery of interest claims that lack a contractual basis.

Final determinations on each issue:

• The appeal was allowed, and the impugned order admitting the Section 9 application was set aside.
• The Court emphasized the need for a clear agreement regarding interest payments for such claims to be enforceable under the IBC.

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