2022 (11) TMI 953 - AT - Insolvency and Bankruptcy

Maintainability of petition - initiation of CIRP - Financial Creditors - interest of three quarters which accrued and became payable as a debt - Application dismissed by Adjudicating Authority on the ground that only the interest amount would not fall within the definition of financial debt until and unless principal amount has also become due and payable - whether amount of interest only claimed by the Appellant is not covered by the definition of financial debt? - HELD THAT - A Financial Creditor would be entitled to file an application for the initiation of CIRP against the Corporate Debtor before the Adjudicating Authority when the default has occurred. As per Section 7(5), if the Adjudicating Authority is satisfied that a default has occurred and the application filed under Section 7 is complete in so far as the conditions are provided in Section 7(2) are concerned and there is no disciplinary proceedings pending against the RP then it may order admission of the application. Whereas Section 7(5)(b) provides that if the Adjudicating Authority is satisfied that no default has occurred or the application filed under Section 7 is incomplete in so far as Section 7(2) is concerned or any disciplinary proceeding is pending againstthe proposed resolution professional then it may reject the application. In order to maintain the application under Section 7 of the Code the financial creditor has to show the default as a condition precedent - The debt has also been defined as a liability in respect of claim towards a financial debt or operational debt and the claim means the right to payment. There is no dispute, in so far as the facts of this case are concerned that the amount of interest became due and payable by the Corporate Debtor to the Appellant on 01.07.2021 to the tune of Rs. 71,80,274/- in view of the condition enumerated in the debenture which says that the debenture shall carry a coupon rate of 6% p.a. on the face value plus securities premium on quarterly rests and also in view of Section 71(8) of the Act. Reliance placed in the Judgment of the Hon ble Supreme Court, rendered in the Case of M/s Orator Marketing Pvt. Ltd. 2021 (8) TMI 314 - SUPREME COURT , in which the question was raised by the Respondent therein that interest free loan would not come within the purview of financial debt, therefore, the application filed as a Financial Creditor would not be maintainable. The Hon ble Supreme Court held that The definition of Financial Debt in Section 5(8) of IBC does not expressly exclude an interest free loan. Financial Debt would have to be construed to include interest free loans advanced to finance the business operations of a corporate body. After referring to various definition appearing in Part I and Part II of the Code and explaining the scheme with the help of the decision in the case of Innovative Industries Ltd. and taking a cue from the decision of the Hon ble Supreme Court in the case of M/s Orator Marketing Pvt. Ltd, we are of the considered opinion that in the facts and circumstances of the present case the application filed under Section 7 of the Code could be maintained in respect of the component of interest which became due and payable, without asking for the principal amount which has not yet become due and payable. Appeal allowed.

Summary

Issues Involved:
1. Whether an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 can be filed and maintained in respect of the component of interest which became due and payable without asking for the principal amount which has not yet become due and payable.

Detailed Analysis:

Issue 1: Whether an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 can be filed and maintained in respect of the component of interest which became due and payable without asking for the principal amount which has not yet become due and payable.

The appeal was directed against the order dated 23.05.2022 passed by the Adjudicating Authority (National Company Law Tribunal, New Delhi Bench -V) which dismissed an application filed by the Appellant under Section 7 of the Insolvency and Bankruptcy Code, 2016 (the Code) on the ground that the amount of interest only claimed by the Appellant is not covered by the definition of financial debt, thus rendering the application under Section 7 of the Code not maintainable.

The Respondent had allotted 5,60,000 debentures of Rs. 1000 each to the Appellant on 31.04.2011 with specific terms and conditions. These debentures could be redeemed at any time at the option of the issuer or at the request of the debenture holders after one year but before 31st March, 2026, and carried a coupon rate of 6% p.a. payable on face value plus securities premium on quarterly rests.

The Appellant filed an application under Section 7 of the Code in respect of interest of three quarters which accrued and became payable as a debt. The Adjudicating Authority dismissed the application on the ground that only the interest amount would not fall within the definition of financial debt until and unless the principal amount has also become due and payable.

Counsel for the Appellant argued that an application under Section 7 of the Code shall be maintainable even on the component of interest if it crosses the threshold limit being part of the financial debt. They cited the Supreme Court's decision in M/s Orator Marketing Pvt. Ltd. Vs. M/s Samtex Desinz Pvt. Ltd., which held that interest-free loans are financial debts and the application under Section 7 was maintainable.

Counsel for the Respondent contended that as per the scheme of the Code, financial debt means the debt along with interest and not the interest independently. They argued that the decision in the case of M/s Orator Marketing Pvt. Ltd. was not applicable as it dealt with the aspect of the principal amount advanced without interest which had become due and payable.

The Tribunal referred to various definitions and provisions under the Code, including the definitions of Corporate Debtor, Corporate Person, Debt, Claim, Default, Creditor, Financial Creditor, and Financial Debt. They also referred to Section 7 of the Code, which allows a financial creditor to file an application for initiating corporate insolvency resolution process against a corporate debtor when a default has occurred.

The Tribunal also referenced the Supreme Court's decision in Innovative Industries Ltd. Vs. ICICI Bank, which explained the scheme of the Code in respect of Section 7, and the Supreme Court's decision in M/s Orator Marketing Pvt. Ltd., which held that an interest-free loan would qualify as a financial debt.

The Tribunal concluded that the application filed under Section 7 of the Code could be maintained in respect of the component of interest which became due and payable, without asking for the principal amount which has not yet become due and payable. The appeal was allowed, and the impugned order was set aside without any order as to cost.