Corporate Insolvency Proceedings: Can Interest be Claimed as a Part of Debt?

[Lyssa Maria Brito is a 4^thyear B.B.A.L.L.B. (Hons.) student at School of Law Christ (Deemed to be University), Bengaluru]

Introduction

Earlier, in section 433(e) of the Companies Act, 1956, there was no distinction provided between a financial and an operational debt. Section 433(e) only provided that a company may be wound up by the court if it is unable to pay its debts. Therefore, the issue of whether interest was included within the purview of a debt did was not addressed within the statute. However this was addressed by the courts through various decisions. Subsequently, with the introduction of the Insolvency and Bankruptcy Code, 2016, both financial and operational debts have been specifically defined and differentiated with the former expressly providing for interest.

Situation under the Companies Act, 1956

In Delhi Cloth and General Mills co. Ltd. v. Stepan Chemicals Limited (1986) 60 Comp. Cas 1046 it was held that if, after the filing of the petition under section 439 of the Companies Act, 1956, the company pays the principal amount during the pendency of the petition but does not pay the interest, the company can be ordered to be wound up.Following this case, the Orissa High Court in Krishna Chemicals v. Orient Paper and Industries Ltd.99 (2005) C.L.T. 324 held that a company is liable to be wound up under section 433(e) of the Companies Act, 1956 for non-payment of interest. In both of these cases the debt arose as consideration for the sale of goods.

Finally in Vijay industries v. NATL Technologies Limited (2009) 3 S.C.C. 527the question arose before the Supreme Court whether interest payable on the sum due would be a debt so as to attract the provisions of sections 433 and 434 of the Companies Act, 1956. The Court held that where the amount due as regards the principle stands admitted, but there is a dispute about the payment of interest, the application for winding up cannot be dismissed. In this case it was not disputed before the Court that failure to pay the agreed interest would come within the purview of the word ‘debt’.

In several cases the High Courts have taken a liberal view of the matter to the effect that even if interest is not payable by way of an agreement, usage or custom, the company court will have the requisite jurisdiction to go into such a question and admit a company petition for non-payment of interest on the admitted dues as in Devendra Kumar Jain v. Polar Forgings and Tools Ltd. (1995) 84 Comp Cas. 766.

Current Situation under the Insolvency and Bankruptcy Code, 2016

Now, however, with the introduction of the Insolvency and Bankruptcy Code, 2016 debts have been classified into financial and operational debts. Section 5(8) of the Code defines a financial debt as a debt along with interest, if any, which is disbursed against the consideration for the time value of money. Generally the interest that is payable on a loan at a rate mutually agreed by the parties represents the “time value of money” which is the consideration for advancing a loan. Therefore under section 9 of the Code, insolvency proceedings can be initiated for default of payment of interest which has become due.

Section 5(21) of the Code defines an operational debt as a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority. The issue that then arises is whether interest can be claimed for an operational debt as well.

In Wanbury Ltd. v. Panacea Biotech Ltd. [2017] 141 S.C.L. 578 the Chandigarh Bench of the National Company Law Tribunal (NCLT) observed that in the definition of the term operational debt’ under section 5(21) of the Code, the word ‘interest’ has not been mentioned as opposed to the use of the word in the definition of a financial debt. It was held that it was not the intention of legislature under the ‘Code’ that the NCLT should determine the rate of interest for delay in payment and grant time to the company to pay the amount as per directions. Therefore, since the entire amount of ‘debt’ as per the intention of the legislature under the Code was paid by way of cheques, the petition for winding up for non-payment of interest for delay was rejected.

However the Mumbai Bench of the NCLT took the contrary view in DF Deutsche Forfait AG and Anr. v. Uttam Galva Steel Ltd. C.P. No. 45/I&BP/NCLT/MAH2017 where it was observed that if a party fails to repay within a fixed time, then interest can claimed over an operational debt as well. In this case, payment for goods was to be effected by executing two bills of exchange for the sale consideration with a maturity period of 180 days. The corporate debtor failed to make the payment within the maturity period and insolvency proceedings were commenced. It was contended by the corporate debtor that the petitioners cannot claim interest over the operational debt by showing two bills of exchange as collaterals as it would then amount to a financial debt. However, the Tribunal held that while an operational debt is normally based on an agreement to pay for goods or services, it does not mean that interest cannot be claimed particularly if the party fails to repay within the fixed time. The difference between a financial debt and an operational debt is that the former is advanced to get interest over the money and the latter happens in the course of business in relation to goods or services. As time passes, the ‘time value of money’ is a factor that is present in both kinds of transactions and the operational creditor is not barred from claiming interest.

Conclusion

The position of law with respect to claiming of interest as a part of a financial debt under the Insolvency and Bankruptcy Code, 2016 is clear. However, due to conflicting decisions of the of the coordinate benches of the NCLT the position of law is not clear in so far as operational debts are concerned. From the Wanbury Ltd. case it appears that the classification of debts into financial and operational debts debars an operational debtor from claiming interest. However, from the DF Deutsche Forfait case it appears that the ‘time value of money’ factor is not exclusive to financial debts and therefore interest can be claimed in case of operational debts as well.

– Lyssa Maria Brito