Interest default alone can result in insolvency process initiation

Brief Overview:

If the interest default meets the threshold criteria, then proceedings under Section 7 of the Insolvency and Bankruptcy Code (“I&B Code”) are maintainable. This is even so where the principal amount has not yet become due and payable.

Technical Details:

The Corporate Debtor had allotted certain debentures to the Appellant wherein the interest was payable on the face value plus securities premium, on quarterly rates.

However, the Corporate Debtor failed to pay the interest and an application under Section 7 of the I&B Code was filed due to default in respect of interest of three quarters which accrued and became payable as a debt.

The Adjudicating Authority dismissed the application under Section 7 of the I&B Code on the ground that ‘only the interest amount’ would not fall within the definition of financial debt until and unless the principal amount has also become due and payable.

On appeal before the NCLAT, the Appellant argued that an application under Section 7 of the I&B Code is maintainable even if the default only pertains to the interest component, in the event it exceeds the requisite threshold limit of 1 Crore.

The Corporate Debtor’s argument that as per the scheme of the I&B Code, financial debt means debt along with interest and not the interest independently, was rejected by the NCLAT.

The NCLAT relied upon the following observations made by the Apex Court :

1)   Default is defined in Section 3(12) of the I&B Code in very wide terms to construe non-payment of a debt, once it becomes due and payable, which even includes non-payment of any part thereof or an instalment amount. Innoventive Industries Ltd. v. ICICI Bank, 2018 1 SCC 407.

2)   ‘Financial debt’ means outstanding principal due in respect of a loan and would also include interest, thereon, if any interest were payable. If there is no interest payable on the loan, only the outstanding principal would qualify as a financial debt. Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd., Civil Appeal No. 2231 of 2021.

Accordingly, the NCLAT held that an application filed under Section 7 of the I&B Code was maintainable in respect of the component of interest which became due and payable, even if the principal amount had not yet become due and payable.

For further details, please see:

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