A Debate Reignited - Whether ‘Interest’ on Delayed Payment Constitutes ‘Debt’ for IBC?March 18 2019
Priya Agrawal & Rahul Agarwal
The National Company Law Tribunal (NCLT) (Kolkata Bench) admitted Eastern Coalfields Ltd. to Corporate Insolvency Resolution Process (CIRP) for default in the payment of interest (Gulf Oil Lubricants India Ltd. v. Eastern Coalfields Ltd.). The order has reignited the debate on whether interest on delayed payment and default in respect thereof, constitutes admitted debt enabling a creditor to approach NCLT?
Under the erstwhile Companies Act, winding up applications could be made on account of “inability to pay debts”. The Andhra Pradesh High Court interpreted “inability to pay debts” in Reliance Infocomm Limited v. Sheetal Refineries Private Limited to mean a situation where a company is commercially insolvent, i.e. the existing and provable assets would be insufficient to meet the existing liabilities. The Company Court could always hold that it was not ‘just and equitable’ to order winding up of an otherwise solvent corporate entity. The IBC takes away this discretion; CIRP would be initiated the moment default in respect of a debt is demonstrated.
i) ‘Debt’ should be ascertained
Under the Companies Act, ‘debt’ referred to an ascertained and definite amount ‘due’, and not a claim requiring assessment before it became due and payable. Under Section 433(e), debt must be determined, or be a definite sum of money, payable immediately or at a future date. A Company Court, which follows a summary procedure, did not decide bona fide disputes requiring detailed investigations.
Section 3(11) of IBC defines “debt” to mean a liability or obligation in respect of a claim which is due from any person, while Section 3(6) defines “claim” and Section 5(21) defines “operational debt”. In the context of an operational debt, NCLT has interpreted debt to mean an ascertainable claim recoverable in the eyes of law.
ii) ‘Debt’ should not be “disputed”
Under Section 8(2)(a), a Corporate Debtor can reply to the demand notice highlighting the existence of a dispute before the demand notice is issued by the Operational Creditor, thereby avoiding CIRP. Section 5(6) of IBC defines a “dispute” in inclusive terms, relating to the (a) the existence of the amount of debt; (b) the quality of goods or service; or (c) the breach of a representation or warranty; the dispute should not be a sham, but must exist and be clearly discernible from previous conduct; the dispute should be a plausible contention requiring further investigation and not be a patently feeble legal argument or an assertion of facts unsupported by evidence.
iii) Interest as ‘Debt’?
‘Debt’ may include not only the principal amount, but also the interest due thereon. This is clearly the case where a contract specifically provides for payment of interest for delayed payment of money or where a court/tribunal/arbitrator has decreed the payment of interest.
However, the position is not very clear when it comes to demand of interest without a contractual clause. When the claim arises out of the supply of goods or services, and is made on the basis of purchase orders (without any written contract between the parties), the invoice issued by the supplier may stipulate payment of interest at a certain rate beyond the credit period. Even though the invoice or the bill is not signed by the receiver, would acceptance of the goods/services supplied pursuant to the invoice, result in those arising out of a concluded contract?
Invoices as contracts
It is well understood that a contract need not necessarily be in writing, and its terms can arise out of mutual understanding. Ordinarily speaking, the proof of such contract having come into existence and its terms, would require evidence to be adduced. However, for purposes of proceedings under Order 37 CPC, the Bombay High Court in Jatin Koticha v. VFC Industries Pvt. Ltd. and the Madras High Court in Olive Tree Trading Pvt. Ltd. v. F.lli De Cecco Di Filipro – FAra S. Martino SPA, have held that acceptance of goods/services pursuant to an invoice without demur, and despite invoices not signed by both parties, would make the suit maintainable as a summary suit as the invoices must be treated as a written contract.
Regulation 7(b)(ii) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 enables the debt to be demonstrated through an invoice. One may argue that there is no reason not to read the invoice as a whole and restrict the assent of the receiver of goods/services only to the principal amount but not to also pertain to the stipulation for interest; the failure of the receiver of goods/ services to dispute the stipulation of interest either at the time of placing an order, or soon after receiving the goods/services, should be construed in favour of the supplier.
Judgments under the Companies Act
Some courts held that non-payment of interest will amount to an inability to pay debt and therefore, afford a ground for a winding-up petition to be instituted; these judgments primarily sought to avoid the multiplicity of proceedings that would inevitably result in case a creditor was required to institute separate proceedings for claiming interest while the principal amount was admitted/paid. However, certain other cases held that winding up proceedings do not lie to recover debt, and the Company Court cannot be used as a forum by the creditor for establishing a claim of interest.
In the first line of cases are the Punjab & Haryana High Court judgment in Stephen Chemicals Ltd. v. Innosearch Limited and the Madras High Court decisions in Tube Investments of India Limited v. Rim and Accessories Private Ltd. and Rashid Leathers (P) Ltd. v. Superfine Skin Traders. The Delhi High Court, in Devendra Kumar Jain v. Polar Forgings and Tools Ltd., held that even in absence of an agreement between the parties as to the rate of interest, the Company Court can determine the reasonable rate of interest, and to avoid multiplicity of proceedings, also calculate its quantum.
Some of the judgments, taking a contrary view, are Multimetals Ltd. v. Suryatronics Private Ltd., Gangadhar Narasinghdaj Agarwal v. Timble Private Limited and Uni-Systems (P) Ltd. Stephan Chemicals Ltd. and Kitply Industries Ltd. v. Harinarain and Sons (P) Ltd. These judgments reason that a company can be wound up only when it is proved that the debt claimed is definite and undisputed. Section 61(2)(a) of the Sales of Goods Act as also provisions of the Interest Act confer discretion to civil court to award interest, and that too in a suit for recovery of money or damage, which winding-up proceedings are not.
The Karnataka High Court, in Jyothi Limited v. Boving Fouress Limited, attempted to synthesize the law. The Court held a credit bill or invoice to be a unilateral demand by the supplier and interest could be awarded on its terms only if it was supported by an agreement or promise to pay interest by the receiver. Such agreement, in turn, could be established with reference to correspondence, by counter-signing of the Bill by the purchaser, or by acceptance by the purchaser of the term in the Bill relating to interest. The Court held that in absence of a contractual or legal liability, mere omission to deny a demand made in a notice will neither create a liability, nor act as an estoppel for subsequent denial by the company.
The Supreme Court, in Vijay Industries v. NATL Technologies Limited, relied upon the provisions for payment of interest in the Payment of Interest Act and the need to avoid multiplicity of proceedings to differentiate between two situations: one where the amount of debt was not definite or ascertainable because of bonafide dispute, and the other where though the principal amount stood admitted, but a question arose as to whether any agreement had been entered into for payment or the rate of interest. In the latter case, the Court held that the application for winding up cannot be dismissed and even awarded interest at a rate on its discretion.
However, in Vijay Industries (supra), the Supreme Court did not specifically examine that very often, the conduct of parties is quite contrary to the terms of the purchase order. Moreover, the provisions for interest (under the Sale of Goods Act or Payment of Interest Act) are relied upon in proceedings for recovery, which a winding up petition is not, and the defense of counterclaim or set off are also not available to a corporate entity in such proceedings. Further, in Vijay Industries (supra), the purchaser having put a countersignature at the bottom of every invoice is also a very relevant fact – this signified that the invoice, containing the stipulation of interest, was not a unilateral document but constituted a binding contract between the parties.
Applicability to IBC
In M/s Wanbury Ltd. v. M/s Panacea Biotech Ltd., the NCLT (Chandigarh) found the interest mentioned in the invoices to be a unilateral act of the applicant and rejected the claim of interest. The Tribunal held that it was never the intention of IBC that the Tribunal should determine the rate of interest. In Swastik Enterprises v. Gammon India Limited, the NCLT (Mumbai) observed that the charging of interest ought to be an actionable claim enforceable under law, which it would be, provided it was supported by cogent admissible evidence, that is, it was properly documented and agreed upon. The Bench held that it was necessary for the rate of interest to also have been agreed upon between the parties. The Tribunal held mere filing of a calculation sheet of interest, that too a computer-generated statement, to be a self-serving document; it also observed that the operational creditor ought to produce its ledger account showing accumulation of interest, inclusion of such accrued interest in its income in the balance sheet for that year, and offering such income (on account of accrued interest) to tax.
Recently, the NCLT (Kolkata Bench), in its decision dated 19.12.2018, found that the Corporate Debtor has defaulted in payment of interest, which interest constituted ‘debt’ for IBC. The Bench found that the invoices clearly carried a stipulation of payment of interest @18% on overdue payment, and each invoice bore the signature of the authorized representative of the corporate debtor. Term No. 2 of the General Terms & Conditions of the demand letter also provided for interest @18% per annum on overdue/delayed payment. In these facts, the Tribunal found that the term to pay interest was accepted by the corporate debtor and non-payment of interest constituted default in payment of admitted debt, triggering CIRP.
[Note: The National Company Law Appellate Tribunal, vide its order dated 22.12.2018, in Company Appeal (AT) (Insolvency) No. 807/2018 – Coal India Ltd. v. Gulf Oil Lubricants India Pvt. Ltd. & anr., has stayed the order passed by the Kolkata Bench of the NCLT admitting Eastern Coalfields Ltd. to CIRP.]
There continues to be some ambiguity on whether interest, which does not flow from a written contract, would form part of a debt. The IBC provides an expedited mechanism for resolution of corporate delinquency; the NCLT has not been envisaged as a body to enter into a detailed examination of evidence. In terms of this architecture, the jurisdiction to initiate CIRP under the IBC has been limited to payment of undisputed/admitted amounts. At the same time, the utter inequity in not considering a claim for interest as part of the admitted debt, clearly puts the supplier/provider of the goods/services into great difficulty.
Of late, the Supreme Court has clearly expressed an intention to award interest on equitable grounds. In Dushyant Dalal v. SEBI, the Supreme Court has held the Payment of Interest Act, 1978 to enable Tribunals to award interest from the date on which the cause of action arose till the date of commencement of proceedings for recovery of such interest in equity. One may argue that it is unfair to restrict such award of equitable interest only to public laws/bodies, and not extend it to contractual matters.
Several questions, waiting for a categorical answer, still remain - If the payment of principal was wrongly withheld, never disputed and then paid (for whatever reason), whether interest for delayed payment ought to be awarded? Why must the supplier be made to avail alternative remedies for its claim of interest in such matters and considering the delays that plague the regular judicial process, add to their numbers? One hopes that the issue ignited by the Kolkata Bench of the NCLT in its decision dated 19.12.2018 which is now engaging the attention of the NCLAT, is exhaustively debated and authoritatively settled.
Priya Agrawal & Rahul Agarwal are Advocates practicing at the Allahabad High Court. The authors can be reached at firstname.lastname@example.org and email@example.com
With a premium account you get:
- One year of unrestrcited access to previous interviews, columns and articles
- One year access to all archival material
- Access to all Bar & Bench reports