NCLAT Rules, Adjudicating Authority Can't Presume Applicability Of Interest On Principal Amount In Absence Of Express Agreement Between Parties
Pranav B Prem
In a significant ruling, the National Company Law Appellate Tribunal (NCLAT), Principal Bench at New Delhi, has held that in the absence of an express agreement between the parties stipulating payment of interest on delayed invoices, the Adjudicating Authority cannot presume such an obligation based merely on vague references in invoices. The Bench, comprising Justice Ashok Bhushan (Chairperson), Mr. Arun Baroka and Mr. Barun Mitra (Technical Members), allowed the appeal filed by the suspended director of Exclusive Linen Fabrics Pvt. Ltd. and set aside the order of the NCLT Mumbai Bench which had admitted a Section 9 application and initiated CIRP.
The appeal was filed by Shitanshu Bipin Vora, the suspended Director of Exclusive Linen Fabrics Pvt. Ltd. (Corporate Debtor), challenging the NCLT’s order dated 05.09.2024 which admitted an application filed by Shree Hari Yarns Pvt. Ltd. (Operational Creditor) under Section 9 of the Insolvency and Bankruptcy Code, 2016. The Operational Creditor had claimed a total default of ₹1,29,08,449/-, which included ₹88,16,301/- as principal and ₹40,92,148/- towards interest on delayed payments, calculated at 18% as mentioned in the invoices.
The Appellant argued that there was no agreement between the parties regarding payment of interest on delayed payments, and that the interest component was unilaterally added by the Operational Creditor to inflate the claim amount beyond the ₹1 crore threshold prescribed under Section 4 of the Code. It was submitted that without the interest component, the claim would fall short of the statutory threshold and hence be non-maintainable. The Appellant also contended that the invoices did not contain a specific clause detailing the period or method of interest calculation and that the clause was vague and non-binding.
Furthermore, the Appellant raised serious objections regarding procedural impropriety and violation of natural justice. It was pointed out that after the matter was reserved for orders on 06.08.2024, the NCLT listed the case again on 30.08.2024 without proper notice to the Corporate Debtor, allowing the Operational Creditor to file an additional affidavit introducing a new date of default. The Tribunal eventually passed the impugned order on 05.09.2024 without affording the Appellant an opportunity to respond to the new affidavit.
In response, the Operational Creditor contended that the interest clause was included in all 18 invoices and had never been objected to by the Corporate Debtor. It was also claimed that in earlier instances, the Corporate Debtor had made payments towards interest and even deposited TDS on interest, thereby implying acceptance of the terms.
Upon examination, the NCLAT noted that the interest clause in the invoices merely stated “interest will be charged on delayed payment @18%” but did not specify the applicable time frame—whether annually, monthly or otherwise. The Tribunal observed that this clause was vague and non-specific and, in the absence of a formal agreement, could not constitute a binding obligation. It held: “Without any explicit agreement between the parties regarding levy of interest on delayed payment, just relying on a vague statement does not make it a contractual obligation.”
The Tribunal emphasized that while the definition of "financial debt" under Section 5(8) of the Code explicitly includes interest, the definition of "operational debt" under Section 5(21) does not. Therefore, interest cannot be claimed as part of an operational debt unless there is a specific agreement to that effect.
The Tribunal also referred to several of its earlier rulings including SS Polymers v. Kanodia Technoplast, Swastik Enterprises v. Gammon India Ltd. [Company Appeal (AT) (Insolvency) No. 144, 145, 146, 147 and 148 of 2018], and Krishna Enterprises v. Kanodia Technoplast [2019 SCC OnLine 1310], reiterating that unilaterally imposed interest terms in invoices without contractual consensus cannot be the basis for CIRP. It further distinguished the reliance placed by the Operational Creditor on Jatin Koticha v. VFC Industries [(2007) SCC OnLine 1092] and Prashant Agarwal v. Vikesh Parasrampuria [Company Appeal (AT) (Ins) No. 690 of 2022], observing that those were not applicable in the context of the IBC where the definition of operational debt is restrictive and does not cover interest without agreement.
Addressing the contention regarding the Corporate Debtor’s past interest payments and TDS deductions, the Tribunal found that such isolated transactions did not amount to proof of a consistent and binding agreement to pay interest. It noted that the specific payment made on 02.06.2021, which the Operational Creditor later claimed as interest, had not been disclosed in the Section 9 application. The Tribunal observed that a party cannot rely on a concealed transaction to retroactively support its claim: “This payment alone cannot establish the existence of any arrangement or understanding amounting to a contract, as claimed by Respondent No.1.”
The Tribunal further expressed concern that permitting CIRP in such circumstances would encourage misuse of the Code as a tool for debt recovery, contrary to its objective of resolution. Citing Swiss Ribbons v. Union of India [(2019) 4 SCC 17] and Binani Industries v. Bank of Baroda [2018 SCC OnLine NCLAT 521], the Tribunal underlined that the purpose of the Code is to ensure revival of distressed entities, not to penalize solvent companies.
In conclusion, the NCLAT held that since the interest component could not be considered in the absence of a valid agreement, the total admitted claim fell below the ₹1 crore threshold. Accordingly, the impugned order was set aside and the CIRP initiated against the Corporate Debtor was quashed. The principal amount deposited with the Tribunal was directed to be released to the Operational Creditor, and liberty was granted to the creditor to seek other remedies as per law.
Appearance
For Appellant: Mr. Karan Grover, Advocate
For Respondent: Mr. Govind Manoharan, Ms. Poorva Garg, Mr. Akshay Sinha, Mr. Tenzing Bhutia and Mr. Saswat Pattnaik, Advocates.
Cause Title: Shitanshu Bipin Vora Suspended Director of Exclusive Linen Fabrics Pvt. Ltd. V. Shree Hari Yarns Pvt. Ltd. & 1 Anr.
Case No: Company Appeal (AT) (Insolvency) No. 2204 of 2024
Coram: Justice Ashok Bhushan [Chairperson] , Mr. Arun Baroka [Member (Technical)], Mr. Barun Mitra [Member (Technical)]
[Read/Download order]
