2022 (4) TMI 1302 - Tri - Insolvency and Bankruptcy

Maintainability of application - Mere claim of interest - initiation of CIRP - Operational Creditors - Whether the Application under Section 9 of IBC can be continued for mere claim of interest? - HELD THAT - It can be seen that an application under Section 9 of IBC is principally for taking the Corporate Debtor into CIRP which has become an insolvent. Failure of the Corporate Debtor discharging the debt is a pre-condition for initiation of CIRP against it. If there is an agreement for payment of interest on the debt, the same can be considered while allowing the claim for the principal amount. But when the Corporate Debtor discharges the debt, it would be showing that it is not an insolvent. Hence, declaring the Corporate Debtor as insolvent by ordering CIRP only because of the default in paying of interest which is not agreed upon, would be against the spirit of IBC. The Operational Creditor would nevertheless have the right to claim and recover interest if it is permitted under any other law, by moving an appropriate forum. NCLT does not decide the amount that is due to the Operational Creditor. The only test to admit an application under section 7 IBC is whether a debt above the threshold limit is due and whether the Corporate Debtor has defaulted in repayment. When by the date of admission the operational debt in terms of Section 5 (21), which does not include interest, stands discharged, the interest alone which remains under the claim amount, does not qualify for an operational debt, for the default of which alone CIRP can be ordered. NCLT is not a forum for recovery so as to decide the due amount. When admittedly the principal amount is paid, operational debt ceases to be in existence and consequently application under section 9 becomes invalid. Recently NCLAT while adjudicating an appeal filed in the matter of RAJESH KEDIA EX-DIRECTOR OF AJANTA PAPER AND GENERAL PRODUCTS LTD. VERSUS PHOENIX ARC PRIVATE LIMITED, MR. RAJESH KUMAR MITTAL, IRP FOR AJANTA PAPER AND GENERAL PRODUCTS LTD. 2022 (4) TMI 528 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI , has held that the quantum of debt is not to be considered at the stage of admission of a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). The only requirement for admitting a petition under Section 7 of IBC is that the minimum outstanding debt should be more than the threshold amount provided for Under the IBC. The actual amount of 'Claim' is to be ascertained by the Resolution Professional after collating the 'Claims' and their verification, which comes at a later stage. Considering the clarity of the law which settled that an application under Section 9 of IBC cannot be maintained or continued for a mere claim of interest, this application is liable to be dismissed - Application dismissed.

Summary

Issues Involved:

1. Initiation of Corporate Insolvency Resolution Process (CIRP)
2. Payment of principal amount and interest
3. Applicability of Interest Act in CIRP proceedings
4. Definition and distinction between operational debt and financial debt
5. Validity of CIRP application solely for interest claim

Issue-wise Detailed Analysis:

1. Initiation of Corporate Insolvency Resolution Process (CIRP):
The Operational Creditor, M/s. Macawber Beekay Private Limited, filed an application to initiate CIRP against the Corporate Debtor, M/s. BGR Energy Systems Limited, due to non-payment of debt. The Operational Creditor executed all works under the contracts, and the Corporate Debtor failed to make certain payments. Despite several communications and meetings, the Corporate Debtor did not fulfill the payment obligations as per the agreed terms, leading to the filing of the CIRP application.

2. Payment of Principal Amount and Interest:
The Corporate Debtor admitted to issuing purchase orders and reconciling accounts, agreeing to pay ?9.8 Crores. The Corporate Debtor made partial payments and eventually paid the entire principal amount due. However, the Operational Creditor claimed interest on delayed payments, which the Corporate Debtor contested, stating that the settlement agreement did not provide for interest on delayed payments.

3. Applicability of Interest Act in CIRP Proceedings:
The Operational Creditor argued for the application of Section 3 of the Interest Act, 1978, to claim interest. However, the Tribunal noted that proceedings under IBC are not recovery proceedings, and the application of the Interest Act does not arise. The Tribunal referred to several judgments, including the Supreme Court's ruling in Consolidated Construction Consortium Limited Vs. Hitro Energy Solutions Private Limited, which emphasized that interest claims should be pursued in a court of competent jurisdiction, not through CIRP.

4. Definition and Distinction Between Operational Debt and Financial Debt:
The Tribunal highlighted the difference between operational debt and financial debt as defined under Sections 5 (21) and 5 (8) of IBC, respectively. While financial debt includes interest, operational debt does not. The Tribunal emphasized that interest claims can only be considered if there is an agreement for interest payment. In this case, the principal amount was paid, and the interest claim alone did not qualify as operational debt.

5. Validity of CIRP Application Solely for Interest Claim:
The Tribunal concluded that an application under Section 9 of IBC cannot be maintained solely for an interest claim. The principal amount was already paid, and the interest claim did not constitute an operational debt. The Tribunal cited multiple judgments, including those from NCLT and NCLAT, supporting the position that CIRP cannot be initiated for interest claims alone. The Tribunal emphasized that NCLT is not a forum for recovery and that the Operational Creditor should seek remedy for interest claims in an appropriate court.

Conclusion:
The Tribunal dismissed the application, stating that an application under Section 9 of IBC cannot be continued for a mere claim of interest. The Tribunal reiterated that the purpose of CIRP is to address insolvency, not to serve as a recovery mechanism for interest claims. The Operational Creditor was advised to pursue interest claims in a competent court of law.