Defaulting firm's debt includes both principal and interest: NCLAT

Case related to a company that challenged insolvency proceeding against it for delaying payments to borrower

The National Company Law Appellate Tribunal (NCLAT) said last week that debt owed by a defaulting company includes both the principal amount and the interest on it.

A bench of Justice Ashok Bhushan, Justice M. Satyanarayana Murthy, Member (Judicial), and Naresh Salecha, Member (Technical), said the total amount for maintainability of the claim will include both principal debt amount as well as interest on delayed payment, which was stipulated in the invoice itself in the present case.

“The ratio laid down in this judgment was much needed. This will come as a relief to many creditors,” said Srinivas Kotni, managing partner at Lexport, a law firm.

NCLAT’s judgment, published on July 15, is about Chiranjilal Yarns Trading, a lender, and Bombay Rayons Fashions Ltd, a borrower. Between March 2017 and January 2020, Chiranjilal supplied goods to Bombay Rayons for Rs 2,02,26,017 under nine invoices. Bombay Rayons paid three invoices with delay, partly paid for one, and didn’t pay for the rest.

NCLT Mumbai approved initiating an insolvency process against Bombay Rayons based on the company’s payments record. The company appealed before NCLAT against the insolvency process.

It argued that Section 4 of the Insolvency and Bankruptcy Code (the Code) says that the insolvency process application would only be maintainable if the minimum amount of debt must be Rs 1 crore. The company said the principal amount of debt is only Rs. 97,87,220--an amount below the prescribed threshold limit. “As per a notification issued by the Ministry of Corporate Affairs on March 24, 2020, the threshold limit of Rs 1 crore will be applicable for any application filed under Section 7 or 9 of IBC,” said the company’s lawyer.

He added that by this contention the application was not maintainable and deserved to be dismissed. Bombay Rayons raised issues regarding limitation stating that the cause of action arose as early as 2017 but the petition was filed on 16 December 2020 so it is time-barred by the Limitation Act, 1963.

Replying to the arguments, the NCLAT held that the last date of the invoice was February 1, 2020, and the date of filing of Application before NCLT Mumbai was 31st December the same year, so the application was well within limitation.

Secondly, the tribunal said the interest on delayed payment was clearly stipulated in the invoice and therefore, this will entitle the lender to the ‘right to payment’ and will form part of the debt. “It is noted that the principal debt amount of Rs 97,87,220 along with interest makes the total outstanding payment as Rs. 1,60,87,838. So the outstanding debt is above Rs 1 crore as per the requirement of the Code,” it said.