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NCLAT Delhi: Financial creditor can initiate insolvency process even for the interest component

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In a recent ruling, NCLAT principal bench held that a financial creditor can initiate corporate insolvency resolution process in respect of the component of interest which became due and payable, even if the principal amount has not become due. [Base Realtors Private Limited vs. Grand Realcon Private Limited, Company Appeal (AT) (Ins.) No. 882 of 2022, NCLAT Principal Bench, Delhi]

Brief Facts

The respondent allotted optionally convertible debentures to the appellant on April 31, 2011. The debentures carried a coupon rate of 6% per annum payable per quarter. The respondent defaulted on the interest payments for the quarter ending June, September and December 2021.

Accordingly, the appellant filed an application under Section 7 of the IBC in respect of the accrued interest for the three (3) quarters. The NCLT dismissed the application on the ground that the interest amount would not fall within the definition of “financial debt” unless the principal amount has also become due and payable. Aggrieved by the order of the NCLT, the appellant filed an appeal before the NCLAT.

Issue before NCLAT

Whether an application to initiate corporate insolvency resolution process under Section 7 of the IBC can be maintained in respect of only the interest amount which became due and payable, without asking for the principal amount which has not yet become due and payable.

Statutory Provisions

According to Section 5(8) of the IBC, “financial debt” means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and shall also include any amount raised by issuing debentures.

As per Section 5(7) of the IBC, “financial creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.

As defined in Section 2(6) of the IBC, “claim” means a right to payment and if debt is not paid then it is a “default” which means non-payment of debt as a whole or part of it or instalment which becomes due and payable (as defined in Section 3(12) of the IBC).

Section 7 of the IBC provides that a financial creditor may file an application for initiating corporate insolvency resolution process against a corporate debtor before the NCLT when a default has occurred.

NCLAT’s Order

The NCLAT set aside the order of the NCLT and held that such an application under Section 7 of the IBC is maintainable even for the interest amount, without asking for the principal amount which has not yet become due and payable.

The NCLAT noted that the the debenture is a debt borrowed by the appellant at a fixed rate of interest. It also noted that there is no dispute that the interest amount became due and payable at the end of each quarter and that there is a default in the payment of this interest amount.

NCLAT referred to the judgements of the Supreme Court in Innovative Industries Ltd. vs. ICICI Bank, 2018 1 SCC 401 and Orator Marketing Pvt. Ltd. Vs. Samtex Desinz Pvt. Ltd., 2021 SCC OnLine SC 513.

Concluding Remarks

The NCLAT’s order gave a wider interpretation to the definition of the term “financial debt”.

However, it is important to note that the order does not specifically deal with the respondent’s argument that the definition of “financial debt” includes debt along with the interest and not the interest independently.