S.7 IBC Application Cannot Be Rejected On Account Of “Usurious Penal Interest” Governed By Usurious Loans Act: NCLAT [Read Judgment]

S.7 IBC Application Cannot Be Rejected On Account Of “Usurious Penal Interest” Governed By Usurious Loans Act: NCLAT [Read Judgment]

The National Company Law Appellate Tribunal (NCLAT) has held that an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 cannot be rejected on the ground of “usurious and extortionate penal interest”, which is governed by Usurious Loans Act, 1918.

A bench comprising Justice SJ Mukhopadhaya (Chairperson) and Justice Bansi Lal Bhat (Judicial Member), in Sh. Naveen Luthra v. Bell Finvest (India) Ltd. & Anr. ruled,

“‘The Presidency- Towns Insolvency Act, 1909’ having repealed, and there being a bar of jurisdiction under Section 231 of the ‘I&B Code’ as no civil court have jurisdiction in respect of any matter in which the Adjudicating Authority is empowered to decide under the Code, we hold that the provisions of Sections 3 & 4 of the ‘Usurious Loans Act, 1918’ are not applicable to any of the proceeding under Section 7 or 9 of the ‘I&B Code’.”

The Tribunal was hearing an appeal challenging an order passed on November 15, 2017 by the Mumbai Bench of the National Company Law Tribunal (NCLT), whereby an application under Section 7 of the Code for initiation of corporate insolvency resolution process against M/s. Luthra Water Systems Private Limited (corporate debtor) was admitted.

Mr. Luthra, one of the shareholders of the corporate debtor, had now challenged this order, on the ground that an application under section 7 of the code is not maintainable in view of “usurious and extortionate penal interest”, which is governed by section 3 of Usurious Loans Act, 1918.

NCLAT, however, did not agree with this reasoning, pointing out that the corporate insolvency resolution process is not a litigation and is not decided by a court of law. Asserting that in such a scenario, the adjudicating authority cannot exercise powers under the 1918 Act, it explained,

“Now, the ‘Adjudicating Authority’ deals with the matter of insolvency, which in its first stage is required to take steps for ‘resolution’ of the ‘Corporate Debtor’. Therefore, the Adjudicating Authority being not a Court of law and as the Adjudicating Authority do not decide a money claim or suit, it cannot exercise any of the power vested under Sections 3 or 4 of the ‘Usurious Loans Act, 1918’.”

It further opined that as initiation of corporate insolvency resolution process under Sections 7 or 9 of the Code does not amount to recovery proceedings, the question of deciding the claim, which may include the interest by the Adjudicating Authority, does not arise for the purpose of triggering this process.

“In the aforesaid background, if the application is complete and the Adjudicating Authority is satisfied that there is a debt due to the ‘Financial Creditor’ and there is a default on the part of the ‘Corporate Debtor’, it has no other option but to admit the application in absence of any other infirmity,” NCLAT therefore asserted.

Read the Judgment Here