Interest on inter-corporate deposits may form part of financial debt where oral arrangements and acknowledgments establish the obligation.

For admission of a Section 7 application under the Insolvency and Bankruptcy Code, 2016, financial debt may include interest payable on inter-corporate deposits where the arrangement reflects consideration for the time value of money. The analysis explains that an oral interest understanding may be established through accrued-interest calculations, TDS deduction and payment, partial repayments, and the corporate debtor's written acknowledgment of total outstanding dues. Absence of a written interest agreement does not, by itself, exclude legally payable interest. The total debt, including interest, must therefore be assessed to determine whether default exceeds the statutory threshold.

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Issues: Whether, for admission of an application under Section 7 of the Insolvency and Bankruptcy Code, 2016, the interest component on inter corporate deposits could be included in the financial debt for determining default above the threshold under Section 4, where the interest obligation was supported by oral arrangement, TDS deductions, and the corporate debtor's written acknowledgment of the total outstanding dues.

Analysis: Section 7 of the Insolvency and Bankruptcy Code, 2016 requires satisfaction regarding the existence of financial debt, occurrence of default, and completeness of the application. Section 5(8) of the Insolvency and Bankruptcy Code, 2016 defines financial debt as a debt along with interest, if any, disbursed against consideration for the time value of money. On that statutory framework, interest forming part of the agreed financial arrangement cannot be excluded while assessing the amount of default under Section 4 of the Insolvency and Bankruptcy Code, 2016.

Analysis: The record showed admitted inter corporate deposit transactions, partial repayments, calculation of accrued interest, deduction and deposit of TDS on the interest component, and, most materially, the corporate debtor's reply dated 19.09.2024 acknowledging liability for the total claimed amount and seeking time to pay. The claim for interest was therefore not a unilateral assertion resting only on TDS entries. Absence of a written agreement on interest did not defeat the claim where the surrounding circumstances and subsequent conduct established an oral understanding regarding payment of interest.

Analysis: Excluding the interest component merely because no written agreement existed and treating the case as based only on TDS deductions led to an erroneous computation of default. The relevant inquiry was the total financial debt due and payable, including legally payable interest, and whether that total crossed the statutory threshold. The cumulative material established both the existence of financial debt and default above the threshold required for Section 7.

Conclusion: The interest component was includible in the financial debt for purposes of Sections 5(8), 4 and 7 of the Insolvency and Bankruptcy Code, 2016, and the appellant successfully established financial debt and default above the statutory threshold. The impugned order rejecting the Section 7 application was unsustainable and was set aside in favour of the appellant.

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