Extortionate interest in insolvency claims - disallowance upheld where related-party loans lacked documentation, charge registration, and bona fides.

Adjudicative review addressed whether claimed high-rate interest formed part of financial debt; tribunal found interest excessive and not admissible where loans were related-party advances lacking board resolutions, charge registration, loan documentation, and accounting recognition, and ordered disallowance of the interest. On secured status, failure to register the charge and absence of documentation meant the creditor was not treated as secured; consequence: interest and secured claim treatment rejected. Appeal against the disallowance was dismissed for lack of bona fides and evidentiary support.

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Issues: Whether the Adjudicating Authority erred in declaring the interest at 24% per annum compounded monthly as extortionate and disallowing the entire interest component from the admitted claims of the Financial Creditors in liquidation proceedings.

Analysis: The interest component arose from term sheets recording loans advanced in 2014 to a corporate debtor that had ceased operations earlier; there was absence of board resolutions, absence of stamped/registered documentation for charges with the Registrar of Companies, and non-provision of interest in the corporate debtor's financial statements. The Adjudicating Authority applied the Code's framework including the concepts of financial debt and the jurisdiction to examine claims and transactions under Sections 50 and 60(5), and relied on prior precedent treating exorbitant interest as extortionate. On the facts, the compounding of interest converted a principal of Rs.4.66 crores into Rs.15.70 crores; material indicia (lack of documentation, failure to register charge, no evidence of need for loans) supported characterization of the charged rates as extortionate.

Conclusion: The disallowance of the entire interest component at 24% per annum is sustained; the appeal challenging that disallowance is dismissed and the Adjudicating Authority's finding that the interest is extortionate is upheld (against the appellants).

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