Does interest form a part of the operational debt unless agreed by both the
Insolvency and Bankruptcy Code, 2016 was established on June 1, 2016 under
section 18 of the Companies Act, 2013 to carry out all powers, duties, and
responsibilities given to it by that act and any other applicable law.
Consideration of interest as part of operational debt has been a contentious
issue among the various NCLT's in India. The tribunal has no jurisdiction to
determine the dollar amount of the default or issue a judgement regarding the
amount owed to the financial creditor.
While a summary adjudication as to the
occurrence of default only requires the adjudicating authority to ascertain and
record satisfaction, the authority also has the authority to initiate a CIRP
(Corporate Insolvency Resolution Process) under section 10 and proceed to
appoint an Interim Resolution Professional under section 16 of the Insolvency
and Bankruptcy Code, 2016. This article seeks to answer the following two
questions, which have arisen as a result of the split opinions on the issue of
interest on operational debt in the absence of an agreement between the two
Insolvency as defined by the Bankruptcy and Insolvency Act of 2016
- Whether interest is chargeable on operational debt in the absence of an
agreement to that effect.
- Whether the interest alone can qualify as operational debt in order to
initiate insolvency proceedings
When a debtor cannot pay its creditors, the situation is called insolvency. In
contrast to bankruptcy, insolvency occurs when a person or business is unable to
meet its financial obligations in a timely manner, or, in layman's terms, when
its assets are insufficient to cover its current liabilities. In contrast,
filing for bankruptcy is a formal acknowledgement of financial distress.
After filing for bankruptcy, the company has two options for satisfying its
A company's inability to pay its debts is a clear indicator of insolvency.
- First, a debt restructuring that allows for repayment of existing debt to
- Second, a company is liquidated when its assets are sold to settle its debts.
Section 2 of the Insolvency and Business Closure Act, 2016 governs the
procedures to be followed in the event of the insolvency, liquidation, voluntary
liquidation, or bankruptcy of: a. any company; b. any limited liability
partnership. c. Individual Guarantors or Corporate Debtors d. Partnership and
Proprietary Firms e. Individuals (other than Individual Guarantors) f. Any such
Government Body Incorporated Under Law For The Time Being In Force As The
Central Government May By Notification Specify On This Behalf
After the amendment in 2020 takes effect, a CIRP (Corporate Insolvency
Resolution Process) can be initiated only for INR 1 Cr and above. The insolvency
process against a corporate debtor in default may be started by any of the
- A financial creditor is a person, business, or institution (such as a bank or
non-bank financial company) to whom money has been lent.
- An operational creditor is a provider of operational goods or services.
A corporation or limited liability partnership (LLP) that owes money to an
individual is considered a corporate debtor.
Debt incurred from running a business and money owed to lenders
Before IBC, the Companies Act did not differentiate between "financial debt" and
"operational debt" when deciding whether or not to initiate winding up
proceedings against a company. With the advent of IBC, there are now two
distinct types of debt: unsecured and secured. One, monetary obligations Second,
monetary obligations incurred while running operations.
Financial debt, as defined by clause (8) of Section 5, includes the items listed
in subclauses (a) through I and is defined as a debt plus interest, if any, that
is disbursed against the consideration for time value of money.
Claims for the provision of goods or services, including employment, and debts
for the repayment of dues arising under any law for the time being in force and
payable to the Central Government, a State Government, or any local authority
are all examples of "operational debts" as defined by Section 5(21).
Financial debt includes interest, whereas operational debt does not. Even for
"financial debt," the presence of "interest" is not a necessary condition, as
was decided in Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd
This is because the consideration for operational debt is the service or goods
received by the corporate debtor from the operational creditor, making the term
"interest" irrelevant in this context.
The concept of interest has not been addressed by the Supreme Court, despite the
fact that the case of Swiss Ribbons (P) Ltd v. Union of India addressed the
treatment of Operational debt and financial debt.
In Pioneer Urban Land and Infrastructure Ltd. v. Union of India, the Supreme
Court of India distinguished between "Operational Creditors" and "Financial
Creditors," noting that "one of the important distinctions is that in an
operational debt there is no consideration for the time value of money- the
consideration is of the goods or services availed from the operational
Banks and other financial institutions are best suited to evaluate the corporate
debtor's business viability and feasibility because that is their line of work.
When deciding whether or not to extend a loan, these financial institutions
carefully examine the applicant's market and socioeconomic standing. In
contrast, operational creditors, such as suppliers of goods and services, are
only concerned with recouping the costs they incurred as a result of providing
those goods and services and are not in a position to evaluate the company's
overall viability or potential for success.
Taking into account the Companies Act of 1956, courts have ruled that a
company's inability to pay its debts, including the Interest, constitutes
grounds for starting a winding-up proceeding. In Vijay Industries v. NATL
The Supreme Court distinguished between two scenarios, one in which the amount
of debt is not definite or ascertainable and another in which the principal
amount stood admitted but the dispute arose as to whether any agreement had been
entered into for payment of the rate of interest, by citing the provisions of
the Payment of Interest Act, 1978 and the need to avoid multiplicity of
proceedings. The Supreme Court refused to dismiss the winding up proceeding and
even granted interest at its own discretion.
Do You Have to Pay Interest on Working Capital Loans?
Various NCLTs have reached opposite conclusions on this matter. It was never the
intention of legislature to put an obligation upon the Adjudicating Authorities
to decide the rate of interest, and interest is not chargeable in the absence of
an agreement stipulating "interest." This was the ruling made by the National
Company Law Bench in Chandigarh in the case of Wanbury Ltd. v. Panacea Biotech
Ltd. It was pointed out that under IBC, the adjudicating authority has no
authority to impose interest on the parties or to set the rate of interest.
The NCLT also decided that the appellant's submitted invoices did not warrant
interest payments because they lacked a "specific clause of for interest." There
was no decision made on the merits of the case because the parties settled the
appeal out of court before it reached the NCLAT.
Read Section 15 of the MSME Act, 2006, and the situation takes on new
significance: if the buyer fails to pay the seller on time, the buyer "shall be
liable to pay compound interest with monthly rests to the supplier on that
amount from the appointed date or, as the case may be, from the date immediately
following the date agreed upon, at three times of the bank rate notified to the
When the National Company Law Tribunal (NCLT) New Delhi Bench was presented with
the issue of interest in relation to the MSME Act on August 31, 2017, it
disallowed the appellant's claim for interest on the grounds that the parties'
agreement expressly provided that no interest shall be payable on any money due
to the appellant.
The National Company Law Tribunal also ruled that a claim involving the interest
could only be referred to the Micro and Small Enterprises Facilitation Council
for adjudication because the appellant was registered under the MSME Act.
Interest cannot be claimed as a "industry practise" on an operational debt, as
held by the NCLT Mumbai in Vitson Steel Corp Pvt Ltd. v. Capacite Infraprojects
Ltd. The National Company Law Appellate Tribunal (NCLAT), in Steel India v.
Theme Developers Pvt Ltd., affirmed the latter approach and ruled that
interest could not be claimed unless it was agreed upon by the parties.
The NCLT Mumbai Bench addressed the matter of Govind Sales v. Gammon India
, in which the applicant sought to recover the interest amount
from the alleged corporate debtor in accordance with Sections 15 and 16 of the
MSME Act. That Gammon India had paid Govind Sales the full principal amount was
an admitted fact.
Gammon India had objected to Govind Sales' application on the grounds that it
was not properly verified as a micro, small, or medium enterprise (MSME). The
NCLT rejected this argument, finding that Govind Sales had merely attached a "Udyog
Aadhar Memorandum-Online Verification" form to prove that it was indeed an MSME.
An intriguing question arose in the petition of Swastik Enterprise v. Gammon
India Limited, and that was whether or not the petitioner could press for
admission of petition only on the basis of interest amount after having received
the principal operational debt. It was decided that the petition could not be
maintained because the "operational debt" in question could not be ascertained,
despite the fact that the "Principle amount of debt" had been paid and duly
accepted by the petitioner, and the claim of interest remained unsubstantiated
in the absence of cogent evidence.
The National Company Law Tribunal (NCLT) of Mumbai ruled in Asmi Enterprise
Industries that the Liquidator lacked jurisdiction to hear a claim
that had expired.
As goods or services are supplied against money, there is also some time value
of money for a "operational debt," as was noted in the case of D.F. Deutsche
Forfait AG v. Uttam Galva Steel Ltd. It was noted that it would be
unreasonable to assume that consideration for delays in payment would be left
unpaid for extended periods of time.
Any delay beyond the credit period should entitle the creditor to claim
"interest," as it is common knowledge that today's money is worth less than
yesterday's. "On commercial side, the [operational] creditor claiming interest
is quite normal and justifying, after all, business is always run keeping in
mind the time value of money," the NCLT stated.
The rulings in cases like Wanbury, SS Polymers, Swastic Enterprise have not
shied away from categorically excluding interest in the operational debt. Cases
like Swastik Enterprises are a proof that not only is the interest included in
the operational debt is not allowed but the petition solely for the purpose of
interest is also not allowed in the court of law and therefore in my opinion
these judgements uphold the essence of the IBC, 2016.
Since the National Company Law Tribunal, under the IBC, is not usually envisaged
as a body to enter into detailed examination of evidence and therefore, in
absence of a written contract with respect to payment on interest, the debate
further intensifies as to whether National Company Law Tribunal can admit such
petitions and determine the rate of interest.
Even though it is really a need of the hour that the Honourable Supreme Court
passes a judgement bringing clarity on to the topic, but in the absence of such
a judgement the majority of adjudicating authorities have protected the
interests of debtors.
- Civil Appeal No. 2231 OF 2021
- (2019) 4 SCC 17.
- (2019) 8 SCC 416.
- (2009) 3 SCC 527
- 2017 SCC Online NCLT 475
- CP (IB) No.1579/MB/C-IV/2019
- 2020 SCC Online NCLAT 200.
- CP 1727/IBC/NCLT/MAH/2017
- 2018 SCC Online NCLT 9730
- 2017 SCC Online NCLT 546.
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