2025 (4) TMI 1071 - AT - IBC

Interest cannot be claimed as operational debt without explicit agreement between parties under Section 9

Shitanshu Bipin Vora Suspended Director of Exclusive Linen Fabrics Pvt. Ltd. Versus Shree Hari Yarns Pvt. Ltd., Mr. Rajan Garg Interim Resolution Professional of Exclusive Linen Fabrics Pvt. Ltd.

NCLAT allowed appeal, dismissing Section 9 application filed by operational creditor. Court held that interest cannot be claimed as part of operational ... Payment of interest for delayed payment - no agreement between the parties for levy of any interest on delayed payment - relevant date for calculation of interest - whether Section 9 Application can be accepted on the basis of invoices having total amount claimed as operational debt with interest component which is arrived based on a condition contained in the invoices for delayed payment? - HELD THAT:- The Code defines the term operational debt under Section 5 (21), wherein ‘interest’ has not been specifically mentioned as a part of the debt, unlike in the definition of financial debt provided under Section 5 (8) of Code, wherein the legislation has expressly included the term 'interest' to be a part of the debt, that can form a part of the claim against the Corporate Debtor. This deliberate difference in the language used for both terms by the legislation, clearly provides that interest could not have been accepted by the Adjudicating Authority as a part of the default amount as claimed by the Respondent No 1. It is noted that there is an explicit mention of interest in financial debt but such a provision does not exist for operational debt - Accordingly, the interest can be claimed only if there is an explicit agreement or contract between the parties. The Adjudicating Authority has relied on payment of interest paid in February 2021 and June 2021. However, no document has been produced by the Respondent No.1 substantiating the days in which payment was to be made. The Adjudicating Authority has not delved into the issue of the payment of interest with respect to the operational debt as defined in the code and has relied on the invoices which contains an interest clause of 18% on account of delayed payment - the argument of the Appellant that the Code does not provide the AA with the power to interpret a document as in the facts and circumstances of the case is agreed upon. In the absence of any agreement between the parties, the calculation of interest cannot be agreed by us and the claim with respect to interest on pending invoices is not sustainable. In the absence of any agreement between parties, regarding payment of interest on delayed payment, the claim with respect to interest on pending invoices is not sustainable, and on this ground the captioned Application is liable to be dismissed. Conclusion - The claim of the Operational Creditor with respect to the interest is not maintainable and, in that situation, the claim does not meet the threshold for admitting Section 9 Application. Also it is found that the objective of the Code, that is, maximising the value Debtor's assets, is unlikely to be served by initiating CIRP against the Appellant. The amount deposited with the NCLAT, is released to Respondent No.1 to discharge the liability with respect to the Principal amount - Appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal include:Whether the interest component claimed by the Operational Creditor forms part of the operational debt under the Insolvency and Bankruptcy Code, 2016 (IBC), in the absence of an explicit agreement between the parties.Whether the Adjudicating Authority (National Company Law Tribunal) erred in admitting the Section 9 application by including the interest component to meet the Rs. 1 crore threshold under Section 4 of the IBC.Whether the procedural conduct of the Adjudicating Authority, including rehearing after reserving the order and admitting an additional affidavit without notice to the Corporate Debtor, violated principles of natural justice.Whether the invocation of Corporate Insolvency Resolution Process (CIRP) was an abuse of process, given the existence of pre-existing disputes and the financial health of the Corporate Debtor.Whether the claim for interest on delayed payments, based on vague invoice clauses, is sustainable under the Code.Whether the delay in filing the appeal is condonable.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Inclusion of Interest in Operational Debt under IBCLegal Framework and Precedents: The IBC defines 'financial debt' under Section 5(8) as including debt along with interest, whereas 'operational debt' under Section 5(21) does not expressly include interest. Previous judgments of this Tribunal have consistently held that interest cannot be included in operational debt claims unless there is an explicit agreement between the parties. Relevant precedents include Krishna Enterprises vs. Gammon India Ltd, SS Polymers vs Kanodia Technoplast Limited, and others, which emphasize that interest forms part of operational debt only if contractually agreed.Court's Interpretation and Reasoning: The Tribunal noted the clear legislative distinction between operational and financial debt. The absence of explicit agreement on interest means the interest component claimed by the Operational Creditor cannot be included in the operational debt. The clause in the invoices stating 'interest will be charged on delayed payment @ 18%' was found vague, lacking specification of time period (per annum or otherwise) and conditions for levy, thus non-specific and insufficient to constitute a contractual obligation.Key Evidence and Findings: The invoices annexed as evidence did not specify the interest period or conditions clearly. The Operational Creditor failed to produce any contract or agreement evidencing consensus on interest payment. The Adjudicating Authority's interpretation of the clause as '18% per annum' was held to be beyond its jurisdiction under the Code.Application of Law to Facts: Without an explicit agreement, the interest component cannot be treated as part of operational debt. The Tribunal rejected the Operational Creditor's claim of Rs. 40,92,148/- as interest, thereby reducing the total claim below the Rs. 1 crore threshold required under Section 4 of the IBC for maintainability.Treatment of Competing Arguments: The Operational Creditor argued that interest was payable as per invoice terms and that the Corporate Debtor had paid interest and TDS in the past, implying acceptance. The Appellant countered that such payments were not accompanied by any demand or agreement and that quality disputes and cash discounts evidenced pre-existing disputes. The Tribunal leaned towards the Appellant's position, finding plausible pre-existing disputes and absence of clear agreement on interest.Conclusion: Interest cannot be included in the operational debt claim without explicit agreement. The claim including interest is unsustainable under the Code.Issue 2: Maintainability of Section 9 Application Based on Threshold AmountLegal Framework: Section 4 of the IBC requires that the default amount in a Section 9 application must be Rs. 1 crore or more. The inclusion of interest to meet this threshold is permissible only if such interest forms part of the debt.Analysis: Since the interest component was disallowed, the principal amount alone (Rs. 88,16,301/-) falls below the Rs. 1 crore threshold. Therefore, the Section 9 application is not maintainable.Conclusion: The application initiated under Section 9 is non-maintainable as the claim does not meet the pecuniary threshold.Issue 3: Procedural Irregularities and Violation of Natural JusticeRelevant Legal Principles: Principles of natural justice require that parties be given adequate notice and opportunity to respond to all materials and arguments before an adverse order is passed.Court's Reasoning: The Adjudicating Authority reserved the order on 06.08.2024, then listed the matter again on 30.08.2024 for clarification on the date of default, and allowed the Operational Creditor to file an additional affidavit without informing the Corporate Debtor. The Corporate Debtor was absent on subsequent dates when the affidavit was taken on record and the order pronounced.Findings: The Tribunal found no prejudice to the Corporate Debtor as the hearing was conducted in open court, and the Corporate Debtor's counsel was on record and responsible for monitoring the cause list. The procedural steps taken by the Adjudicating Authority were held not to violate natural justice.Conclusion: No violation of natural justice occurred in the procedural conduct of the Adjudicating Authority.Issue 4: Abuse of Process and Pre-existing DisputesLegal Framework and Precedents: The IBC aims at resolution of insolvency and not mere recovery of dues. The Supreme Court in Mobilox Innovations and other judgments has held that if a dispute is pre-existing and genuine, the Section 9 application should not be admitted. Section 65 of the IBC penalizes fraudulent or malicious initiation of CIRP.Court's Reasoning: The Appellant contended that there were quality disputes and cash discounts indicating pre-existing disputes. The Operational Creditor's attempt to include interest to inflate the claim and initiate CIRP against a solvent company was characterized as an abuse of process.Findings: The Tribunal found merit in the contention of pre-existing disputes regarding quality and payments. The attempt to use CIRP as a recovery tool was held contrary to the spirit of the Code. The Tribunal emphasized that CIRP should not be initiated to penalize solvent companies or for disputed dues.Conclusion: The initiation of CIRP in this case was an abuse of the Code's provisions and not in furtherance of its objectives.Issue 5: Interpretation of Interest Clause in InvoicesAnalysis: The interest clause in the invoices was vague, stating only 'interest will be charged on delayed payment @ 18%' without specifying the time period or conditions. The Adjudicating Authority's interpretation converting it to '18% per annum' was beyond its jurisdiction. The Tribunal held that such vague and unilateral clauses cannot be enforced without agreement.Conclusion: The interest clause in the invoices is non-specific and unenforceable as a contractual obligation.Issue 6: Delay in Filing AppealFacts: The appeal was filed after a delay of 24 days from pronouncement of the order. The Tribunal condoned the delay as prayed for by the Appellant.Conclusion: Delay in filing the appeal was condoned.3. SIGNIFICANT HOLDINGS'The Code defines the term operational debt under Section 5 (21), wherein 'interest' has not been specifically mentioned as a part of the debt, unlike in the definition of financial debt provided under Section 5 (8) of Code, wherein the legislation has expressly included the term 'interest' to be a part of the debt, that can form a part of the claim against the Corporate Debtor. This deliberate difference in the language used for both terms by the legislation, clearly provides that interest could not have been accepted by the Adjudicating Authority as a part of the default amount as claimed by the Respondent No 1.''The clause relating to interest payment is a vague statement. Without any explicit agreement between the parties regarding levy of interest on delayed payment, just relying on a vague statement does not make it a contractual obligation.''The Code does not provide the Adjudicating Authority with the power to interpret a document as in the instant case the Adjudicating Authority has gone ahead to interpret the alleged delayed interest clause from '18%' to '18% per annum'. In the absence of any agreement between the parties, the calculation of interest cannot be agreed by us and the claim with respect to interest on pending invoices is not sustainable.''In the absence of any agreement between parties, regarding payment of interest on delayed payment, the claim with respect to interest on pending invoices is not sustainable, and on this ground the captioned Application is liable to be dismissed.''The IBC is not a debt collection forum. It is not the object of the IBC that CIRP should be initiated to penalize solvent companies for non-payment of disputed dues claimed by an operational creditor.''The primary objective of the Code is resolution, not recovery. The Respondent No.1 has only turned a blind eye to the existing issues between the parties and made misleading submissions before this Tribunal to seek recovery through provisions of the Code, and such an Application seeking insolvency of the Appellant under Section 9 of the Code is in respect of the invoices when there are material pre-existing disputes, is not permitted.''The initiation of CIRP against a healthy and solvent company solely for recovery of disputed dues is an abuse of the process and runs counter to the object, spirit, and purpose of the Code.''The interest component claimed by the Operational Creditor is excluded from the operational debt, and without it, the claim falls below the threshold amount required under Section 4 of the Code, rendering the Section 9 application non-maintainable.'Final Determinations:The interest claimed without an explicit agreement is not part of operational debt and cannot be included in the default amount.The Section 9 application is non-maintainable as the claim excluding interest falls below the Rs. 1 crore threshold.No procedural irregularity or violation of natural justice occurred in the Adjudicating Authority's conduct.The CIRP initiation was an abuse of process, given the pre-existing disputes and the financial health of the Corporate Debtor.The impugned order initiating CIRP is set aside, and the Corporate Debtor is released from CIRP.The principal amount deposited by the Appellant is to be released to the Operational Creditor, while the interest dispute is left open for adjudication by a competent forum.