Compounding of Penal Interest during Moratorium Permitted? – NCLAT, Chennai Bench Decides….

Brief Overview:

Section 14 of the Insolvency and Bankruptcy Code, 2016 (as amended) (“Code”) does not specify any ‘interest waiver’ during the period of moratorium and interest continues to accumulate as per law until the amount is repaid.
Held by the Hon’ble National Company Law Appellate Tribunal, Chennai Bench (“NCLAT”) in the matter of Arun Kumar v. Sripriya Kumar & Ors. [CAAT (I) No. 431/2022].   

Technical Details: 

The Hon’ble National Company Law Tribunal (“NCLT”) passed an order approving a resolution plan for the corporate debtor, wherein the value of the resolution plan was lower than the liquidation value. Further, the financial creditor / bank had been permitted to charge penal interest and capitalize the same during the moratorium under Section 14 of the Code and deduct the same from the value of the resolution plan.
The order passed by the NCLT was challenged before the NCLAT, inter alia on the ground that interest on the claim amount already admitted and crystallised ought not to have been charged since the Code is not meant to be a recovery tool for a creditor. While dismissing the appeal, the NCLAT held that:
1)   Section 14 of the Code does not impose any restriction on charging of interest till the amount is repaid.
2)   The claim of creditors does not stop on initiation of corporate insolvency resolution process, and it is only enforcement action that is suspended during the moratorium under Section 14 of the Code.
3)   It is the commercial wisdom of the Committee of Creditors (“CoC”) to decide the quantum of the amount to be paid to the creditors under the Code and its commercial wisdom is non-justiciable.
4)   As regards the value of the approved resolution plan being less than the liquidation value, the NCLAT observed that since all dues of the corporate debtor were settled to 100% and the CoC in its commercial wisdom had unanimously approved the resolution plan, there was no reason to reject the resolution plan on this ground.
JC Key Takeaways:
The NCLAT has clarified that there is no embargo on imposition of interest on the amount due from the corporate debtor during the period of moratorium under Section 14 of the Code. However, it is to be noted that in this case, the claim for penal interest and capitalization of the same emanated out of a contract between the parties.
For further details, please see:
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