The quandary of inclusion of interest while computing operational debt under IBC.

The component of interest has played a very significant role in sometimes precarious situation of admission of the company into insolvency wherein the required monetary threshold is partially unmet. The question that arises in these situations is whether the component of interest can be added to the total debt to calculate the threshold value for admission of a Company into insolvency. That as the scheme of the Insolvency and Bankruptcy Code, 2016, (Code) clearly differentiate between the financial debt and the operational debt obligations, the moot question therefore is to understand whether the interest can be included in both these types of debt for successfully admission of Company into insolvency under the Code. The Code provides the definition of financial debt under Section 5(8) of the Code, wherein the "financial debt" means a debt along with interest, if any, which is disbursed against the consideration for the time value of money. Therefore, the question does not even arise as the position is amply clear in terms of the Financial Debt, the interest shall be added for calculating the threshold. However, the position under 5(21) of the Code which defines the Operational Debt is unclear as it defines it as, a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues.

The Principal Bench of National Companies Law Appellate Tribunal (‘NCLAT’) was placed with the similar issue in Case of Prashant Agarwal1 wherein, the operation debt claim was amounted to Rs 97, 87, 220, which was below the minimum threshold of Rs 1 crore, at the relevant time, as per Section 4 of the Code. However, inclusion of the interest component, while calculating the total due would make the claiming party to allege for initiation of insolvency under the Code. That the National Company Law Tribunal (NCLT) admitted the case under insolvency, citing another judgment of NCLAT, in Pavan Enterprise2, stating that the if in terms of any agreement any interest is payable then debt will include interest.

The Hon’ble NCLAT in the present matter, while reaching the conclusion, analysed the situation, stating that to include interest, as per the definition of “Operational Debt” as well as “Debt”, Code makes it necessary, to have a liability/obligation in respect of a claim which is due from any person. The definition of Claim under Section 3(11) states "claim" means - a right to payment, amongst other things.

That Hon’ble NCLAT concluded, that since interest on delayed payment was clearly stipulated in invoice and therefore, this will entitle for “right to payment” under section 3(6) of the Code and therefore will form part of “debt” Section 3(11) of the Code. Thus, the case was fit case for admitting the Company into insolvency as per the provision of the Code.

The NCLAT also noted that there are divergent views have been taken by various NCLT. That in one such instance was wherein, NCLT, Chandigarh Bench3 declined to include the component of interest while calculating the threshold stating that the invoices are unilateral act of the creditor, thus the claim by the creditor will not sustain. Further, as the rate of interest was not determined, the intention of legislature was never to put an obligation upon the Tribunal to determine the rate of interest. The question becomes tricker as the Code does not provide the NCLT power to undertake detailed examination of evidence, leading to confusions. In another slightly differing ruling in Steel India v. Theme Developers4NCLAT, held that accumulated interest amount can be claimed only if its mutually agreed by the parties. Thus, a lot of similar litigations are expected to keep popping up unless the same is settled by Supreme Court or the Code is amended to provide power to undertake detailed examination, to clearly settle the position of operational creditor’s claim on accumulated interest amounts.

Meanwhile, it can be concluded with some confidence, on the basis of various available precedents that in case of clear and undisputed agreement, stating the rate of interest, the claim of interest can be added to the total debt for fulling the criteria of admission of a company into insolvency.

By - Devesh Bhatia

  1. Mr. Prashant Agarwal v. Vikash Parasrampuria (Company Appeal No.690 of 2022)
  2. Pavan Enterprises v. Gammon India (Company Appeal No.148 of 2018)
  3. Wanbury Ltd. v. Panacea Biotech Ltd. 2017 SCCOnLine NCLT 475
  4. Company Appeal No. 1014 of 2019, New Delhi.