Status as on- 28/01/2023
The enactment of the Insolvency and Bankruptcy Board of India, 2016 (IBC), hereinafter referred to as “the code” has resulted in a paradigm shift in debt recovery mechanisms for the Corporate Debtors as well as the Creditors. The Code still being a neoteric legislation is still getting broadened in the aspect of implementations through various landmark judgments by the Hon’ble Supreme Court of India.
A recently evolved notion of co-relation of Principal amount and interest levied on it, for the purpose of Section 5(8) of the code and its implication in the application filed under Section 7, has come in light in the case of “Base Realtors Private Limited v. Grand Realcon Private Limited”, Company Appeal (AT) (Ins.) No. 882 of 2022 NCLAT Principal Bench, New Delhi.
Background of the case:
Base Realtors Private Limited (Appellant) received redeemable optionally convertible debentures from Grand Realcon Private Limited (Respondent) on April 31, 2011, with a 6% coupon rate payable on face value plus premium on securities at the end of each quarter. The maturity date for the debentures was March 31, 2026. Since the certificate for the debentures was issued on April 13, 2021, the debentures might be redeemed after one year had passed since that date, and interest was to be calculated as of that date.
Interest accrued in favor of the appellant at the end of the quarters ending in June, September, and December 2021, totalling more than INR 2,39,00,000/- (Indian Rupees Two Crores Thirty-Nine Lakhs.) However, despite the Appellant issuing default notifications at the end of each quarter, the Respondent did not pay the amounts owing to the Appellant.
The Appellant filed an application under Section 7 of the IBC before NCLT, Bench-V, New Delhi in respect of the accrued interest of three quarters. The NCLT dismissed the Application on the ground that only 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 NCLT order, the Appellant filed an appeal before the NCLAT.
Findings of NCLAT:
NCLAT relied on Innovative Industries Ltd. v. ICICI Bank and Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd. To hold that the precedent to file an application under Section 7 is ‘Default’ as defined in Section 3(12) of IBC. The debenture is a loan taken out by the appellant with a set interest rate. There is no question that at the conclusion of each quarter, interest became due and payable by the Respondent to the Appellant, and that the Respondent failed to pay this interest to the Appellant. The Respondent objected to the NCLAT’s use of the definitions of “financial debt” and “financial creditor,” arguing that financial debt encompasses both debt and interest rather than just interest alone. The ruling relies on Orator Marketing’s (supra) decision to import the broad definition of “default” and “financial debt” under the IBC, which includes any sum raised under any other transaction that has the commercial effect of borrowing (Section 5(8)(f) of the IBC), even though it doesn’t directly address this argument.
This NCLAT decision implied an expansion of the definition of “financial debt” to encompass situations where only interest is due, even though the principal amount has not yet become due or payable, after Orator Marketing’s recognition of “financial debt” without interest. This broadens the application of Section 7 IBC proceedings, wherein the adjudicating authority may also admit a corporate debtor into CIRP if the financial creditor can prove that there is a default of interest due and payable by the corporate debtor to the financial creditor that exceeds INR 1,00,00,000 (Indian Rupees one crore) (threshold under Section 4 of the IBC).
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