INTEREST IS NOT PART OF THE OPEATIONAL DEBT

[Mr. M. GOVINDARAJAN]

An operational creditor may initiate corporate insolvency resolution process (‘CIRP’ for short) against a corporate debtor under section 9 of the Insolvency and Bankruptcy Code, 2016, (‘Code’ for short) after observing the formalities as contained in Section 8 of the Code. Section 4 of the Code prescribes the minimum amount of default for initiating a CIRP which is Rs. 1 crore. In respect of CIRP filed by an operational creditor there shall be no dispute existing on the outstanding dues. If both the conditions are not met the application is liable to be rejected by the Adjudicating Authority.

Issue

The issue to be discussed in this article is as to whether interest on the outstanding dues will be added for the calculation of the threshold limit of Rs.1 crore with reference to deciding case laws.

Case laws

In ‘Steel India v. Theme Developers Private Limited’ – 2020 (8) TMI 578 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI – the NCLAT held that interest claimed is not part of operational debt as defined under Section 5(21) of the Code. In the definition of financial debt under Section 5(8) of the Code, interest is specifically defined as part of financial debt. However, in the definition of operation debt under Section 5(20), there is a deliberate omission of the term ‘interest’. Any unilateral stipulation of interest without any agreement or understanding between the parties is wholly untenable and is an attempt to claim inflated amount.

In ‘Khusbhu Dye Chem Private Limited v. Chemical Suppliers India Private Limited’ – 2024 (8) TMI 406 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI - LB, the respondent approached the appellant with the proposal to provide Isopropyl Alcohol, Toluene, Methyl Methacrylate, Methyl Iso Butyl Ketone and Acetone chemicals. The appellant agreed to supply the same. The appellant supplied various chemicals on the order of the respondent to the tune of Rs. 1,82,54,891/- and raised 7 invoices. The agreement is to pay the said amount within 70 days from the date of supply. The said payment was not made by the appellant despite the repeated reminders of the appellant.

The appellant issued a demand notice under Section 8 of the Code to the respondent for the payment of Rs. 1,82,54,891/- on 14.06.2022. The respondent filed reply on 13.07.2022 and 14.07.2022. In the reply the respondent admitted the liability to the appellant. But the respondent did not pay the amount but adjusted with respect to a separate transaction and thus raised a dispute, which was countered by the appellant.

The respondent issued 6 cheques to the tune of Rs. 2.43 crores. While presenting the cheque the same were not honored since the respondent issued ‘Stop Payment Order’. The respondent filed a police complaint against the appellant alleging forgery. The appellant filed an application before the Adjudicating Authority to initiate CIRP against the respondent under section 9 of the Code. The respondent filed a reply before the Adjudicating Authority for the application. The respondent admitted the liability but set-off the same on the ground of adjustment against a separate transaction wherein the Appellant had agreed to purchase 450 MT of Isopropyl Alcohol (‘IPA’ for short) from the respondent, out of which delivery of 143.850 MT of IPA was taken and payment of Rs. 2,36,79,147/-. The Adjudicating Authority, by its Order dated 17.01.2024, rejected the said Company Petition on the contention that the default amount is less than Rs.1 crore and there was pre-existing dispute on the outstanding amount.

The appellant filed an appeal before the National Company Law Appellate Tribunal (‘NCLAT’ for short) against the order of the Adjudicating Authority. The appellant submitted the following before the NCALAT-

• The Adjudicating Authority wrongly concluded that the operational debt amount is less than Rs.1 crore and by wrongly relying upon 6 cheques and police complaint that there was a pre-existing dispute.
• The Adjudicating Authority failed to consider that there is no provision under the Code for set-off/adjustment/counter-claim.

The respondent submitted the following before the NCLAT-

• The operational creditor failed to disclose the pre-existing dispute before the Adjudicating Authority.
• The Appellant is guilty of suppressio veri and suggestio falsi, in as much as, these disputes existed much prior to the filing of the Application or, for that matter, before issuance of the demand notice itself, and the Operational Creditor deliberately suppressed these material facts from the Adjudicating Authority.
• The demand of the Appellant is untenable as the invoices amounting to Rs. 1.82 Crores got adjusted against the outstanding payment which was required to be paid by the appellant against the material purchased by the respondent on behalf of the appellant.
• The appellant had issued the purchase order dated 18.06.2020 to the respondent for supplying 450 MT of IPA at the rate of Rs. 139.50/- per kilogram.
• On 18.07.2020, the appellant issued one credit note of Rs. 72,25,140/- instead of Rs. 5,40,07,425/-
• The alleged due amount being claimed by the appellant as principal amount is also less than the threshold limit of Rs.1 crore as per the provisions of Section 4 of the Code.

The NCLAT considered the submissions made by the parties to the appeal. The NCLAT observed that the appellant has claimed the outstanding amount of Rs. 1.82 crore. The NCLAT relied on various judgments in which it was held that interest amount would not come under the purview of the Code. The NCLAT observed that after disallowing payment of Rs. 20,71,000/- made by the Respondent and the debit note of Rs. 72,25,140/- and disallowing the interest, the operational debt amount is less than the threshold value of Rs.1 crore. The NCLAT held that the claim amount is less than Rs.1 crore and therefore the application filed by the appellant before the Adjudicating Authority is not maintainable.

In regard to the pre-existing dispute the NCLAT considered the emails communicated between the parties. The appellant ordered 450 MT of IPA, which was not picked fully as only 143.850 MT of the material was initially lifted. The respondent has been asking to lift the remaining 306.150 MT of IPA. The respondent also refers to the credit note given by the appellant to the Corporate Debtor. This has not been accepted by the respondent claiming it to be a one-sided communication. All this goes on to establish that there has been a dispute which has been going on between the appellant and the respondent. From the above emails on record and also on the basis of the materials on record, the NCLAT was satisfied that the Corporate Debtor had raised a pre-existing dispute with respect to the amount claimed by the Operational creditor. Further both the parties were having a dispute with respect to some cheques issued by the respondent. The respondent has claimed that the appellant has fraudulently changed the dates of cheques and presented them in the bank for clearing but the respondent immediately stopped the payment of the cheques and also filed a police complaint against the appellant for committing cheating and forgery. This is another sort of dispute.

In regard to the allegations of the appellant that there is no set off concept in the Code. The NCLAT observed that this kind of set off was made before the initiation of CIRP.

The NCLAT held that the Adjudicating Authority's Order dated 17.01.2024 is well-founded and does not warrant interference. The operational debt amount claimed by the Appellant is less than the threshold limit required under Section 4 of the Code, and there are pre-existing disputes between the parties. Therefore, the NCLAT dismissed the appeal filed by the appellant.