Adjudicating Authority Can't Presume Applicability Of Interest On Principal Amount In Absence Of Express Agreement Between Parties: NCLAT

The National Company Law Appellate Tribunal (NCLAT) New Delhi bench of Justice Ashok Bhushan (Judicial Member), Mr. Arun Baroka (Technical Member) and Mr. Barun Mitra (Technical Member) has held that while deciding an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (Code), the Adjudicating Authority cannot presume the applicability of interest based on vague statements in the invoices issued by the Operational Creditor. Unless there is a specific contract between the parties stipulating the payment of interest on delayed payments, such claims for interest are not legally sustainable. Brief Facts: The present Appeal has been filed by Shitanshu Bipin Vora (Appellant) under Section 61 of the Code challenging the Order dated 05.09.2024 passed by the National Company Law Tribunal, Mumbai Bench, in C.P. (IB) No. 1133/MB/2023, whereby Corporate Insolvency Resolution Proceedings (CIRP) were initiated against Exclusive Linen Fabrics Pvt. Ltd.(Corporate Debtor). The Appellant is the suspended Director of the Corporate Debtor. The Impugned Order was passed on an application filed by Shree Hari Yarns Pvt. Ltd.(Respondent No.1) under Section 9 of the Code, alleging a default of ₹1,29,08,449/- by the Corporate Debtor. Contentions: The Appellant submitted that no debt is due and payable by the Corporate Debtor and that the alleged default includes an arbitrary interest component of ₹40,92,148/-, in the absence of any agreement permitting such interest. It was further submitted that the Respondent No-1 has sought an interest of ₹40,92,148/- towards interest for delayed interest at 18%. However, the Respondent No-1 while raising its invoices added the interest component without any discussion with the Appellant. It was also argued that there was no agreement between the Appellant and the Respondent No-1 with regard to the interest component and as such the Respondent No-1 has arbitrarily added the interest amounts. Lastly, it was submitted that the Adjudicating Authority was further wrong in providing an opportunity to the Respondent No. 1 to file an Additional Affidavit and that too without providing due opportunity to the Corporate Debtor to rebut the contentions raised therein. Per contra, the Respondent submitted that Appellant for the first time before the NCLT contended that there is no agreement towards interest. All the 18 invoices contain an interest clause which were accepted without demur. Appellant paid interest and deposited TDS in the past on the Debit Notes issued by Respondent No.1 Observations: The Tribunal at the outset noted that Code defines the term operational debt under Section 5 (21), wherein 'interest' has not been specifically mentioned as a part of the debt, unlike in the definition of financial debt provided under Section 5 (8) of Code, wherein the legislation has expressly included the term 'interest' to be a part of the debt, that can form a part of the claim against the Corporate Debtor. The Tribunal further observed that the clause on interest does not specify the time period after which delayed payments will attract interest, nor does it clarify whether the interest is to be calculated annually, monthly, or over any other period. The clause was found to be non-specific, as the time period used to determine the date of default is indefinite. It further added that therefore, the Appellant is right in saying that the statement is vague. Additionally, there is no agreement on record between the parties that justifies the imposition of interest on delayed payments. Without a clear agreement regarding the levy of interest, relying on a vague statement does not create a contractual obligation. The Tribunal further opined that the Code does not vest the Adjudicating Authority with the power to interpret contractual terms, as seen in the present case where the Authority interpreted the alleged delayed interest clause as “18% per annum.” Based on the above, while agreeing with the Appellant's contention, it was held that such interpretation falls outside the scope of powers conferred by the Code. In the absence of any explicit agreement between the parties, the calculation of interest cannot be presumed, and therefore, the claim for interest on pending invoices is unsustainable. It further observed that the contention that the payment made by the Corporate Debtor on 02.06.2021 was towards interest cannot be accepted, as this payment was allegedly concealed by Respondent No.1 in its Section 9 application under the Code. Respondent No.1 cannot now rely on this same payment to support its argument regarding the interest component. Based on the above, it was held that therefore, this payment alone cannot establish the existence of any arrangement or understanding amounting to a contract, as claimed by Respondent No.1. The NCLAT in SS Polymers vs Kanodia...

Adjudicating Authority Can't Presume Applicability Of Interest On Principal Amount In Absence Of Express Agreement Between Parties: NCLAT

Mohd Malik Chauhan

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Adjudicating Authority Can't Presume Applicability Of Interest On Principal Amount In Absence Of Express Agreement Between Parties: NCLAT

Mohd Malik Chauhan

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