Operational Creditor cannot be permitted to recover interest on the debt amount by initiating a Corporate Insolvency Resolution Process when the debt amount has been paid by the Corporate Debtor

The preamble to the Insolvency and Bankruptcy Code, 2016 (“Code”) indicates that the purpose behind the enactment of the Code is resolution of insolvency of corporate persons, partnership firms and individuals in a time bound manner with an aim to maximise the value of assets of such persons and promote entrepreneurship. In consonance with the objective of the Code, National Company Law Appellate Tribunal (“NCLT”), New Delhi in its recent decision in the case of Manish Mukim v Ms. Rakhi (Proprietor of Srinivasa Cloth Mills) and Anr., Company Appeal (AT) (Insolvency) No. 617 of 2023, set aside an order of the NCLT- Kolkata Bench-II and observed that the Code cannot be used as a mechanism for recovery of debt.

Factual Background

The National Company Law Tribunal, Kolkata passed an order on April 24, 2023 (“impugned order”) admitting a petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 filed by an Operational Creditor to initiate a Corporate Insolvency Resolution Process (“CIRP”) against Chandrima Fashion Fabrics Private Limited (“Corporate Debtor”). The Corporate Debtor, being aggrieved by the impugned order filed an appeal before the National Company Law Appellate Tribunal, New Delhi.

The Operational Creditor used to supply fabric materials to the Corporate Debtor. A demand notice was sent to the Corporate Debtor on November 25, 2019, in respect of the unpaid invoices which were raised between April 2019 and October 2019. Thereafter, on January 31, 2020, a settlement deed was executed between the parties wherein it was agreed that the Operational Creditor would accept INR 1,14,84,292 from the Corporate Debtor. In furtherance to the terms of the settlement deed, the Corporate Debtor made part payments. The Operational Creditor issued another demand notice on June 19, 2020, claiming an amount of INR 1,30,27,634 and stating that the Corporate Debtor had breached the settlement deed.

Subsequently, the Operational Creditor initiated CIRP against the Corporate Debtor by filing an application under Section 9 of the Code which was admitted by the NCLT. During the course of the proceedings, the Corporate Debtor paid the settlement amount to the Operational Creditor. However, the Operational Creditor argued that it was aggrieved as there was a delay in receiving payment and hence, they were not willing to refund the amount to the Corporate Debtor or to withdraw the CIRP.

The Corporate Debtor argued that the payment of dues has been made and the fact that the Operational Creditor has accepted the same indicates that it has waived the timelines agreed between the parties. Further, it was contended that the Operational Creditor’s claim of interest was not maintainable as the invoices and other documents did not have any specific provision to that effect. The Corporate Debtor argued that the CIRP application, which was filed on September 22, 2020, was not maintainable as the outstanding amount did not meet the threshold limit of Rs 1 crore after deducting the instalments which fell due during the exemption period prescribed under Section 10 A of the Code.

On the other hand, the Operational Creditor stated that the debt was not paid within the agreed deadlines and that the Corporate Debtor is liable for the said default. It was contended that, for the delayed payment, the Operational Creditor has a legally enforceable right to reclaim the interest waiver along with penalty, as per the Settlement Deed.

In the impugned order, NCLT stated that it is not clear as to what payments were made by the Corporate Debtor in respect of the settlement deed. It was noted that the petition was within the pecuniary jurisdiction mentioned in the Code and that the Corporate Debtor did not raise any defence in terms if the pre-existing disputes.

The question before the Appellate Tribunal was to ascertain whether the application filed by the Operational Creditor was not maintainable since it arose from a default which occurred during the prohibited period mentioned under Section 10A of the Code. It is pertinent to note that as per the provisions of Section 10A, an application for initiation of CIRP under Section 7, 9 and 10 cannot be made for a period of six months (or any further period as may be notified) from March 25, 2020.

Ruling of the Appellate Tribunal

• The Appellate Tribunal observed that the NCLT did not take into account the fact that the outstanding amount did not meet the threshold limit of Rs 1 crore as stated under the Code and hence, there was a gross error on part of the NCLT. The Appellate Tribunal, in order to arrive at its findings referred to the payment schedule which was agreed between the parties wherein aside from one instalment of INR 10,00,000 all the other instalments were to be paid during the exempted period Section 10A. In view of the same, the application under Section 9 of the Code preferred by the Operational Creditor was liable to be outrightly dismissed.

  
  

• Relying on the decision of the Apex Court in Ramesh Kymal vs.  Siemens Gamesha Renewable Power Pvt. Ltd., (2021) 3 SCC 224, it was observed that if a Corporate Debtor was in default, during the Section 10A period, on account of Covid-19 pandemic, they ought to be protected from any insolvency application filed against them for such a default. Therefore, any default committed between the period of March 15, 2020, and February 28, 2022, was protected and had an immunity against initiation of CIRP proceedings. The Appellate Tribunal noted that this is in consonance with the intention of the legislature, which is to “protect the Corporate Debtor from being shoved into the morass of insolvency in the extenuating circumstances inflicted by the Covid-19 pandemic”.

  
  

• In the facts of the instant case, the Appellate Tribunal held that the operational debt above the threshold limit is neither due nor payable and hence CIRP cannot be initiated. It was also observed that the “the provisions of IBC cannot be turned into a debt recovery proceeding as it is a beneficial legislation which envisions the revival of the Corporate Debtor and bringing it back on its feet from the perils of extinction.”

  
  

• The Appellate Tribunal acknowledged that, though belatedly, the entire payment in terms of the settlement deed has already been made by the Corporate Debtor. It held that the conduct of the Operational Creditor in harassing the Corporate Debtor cannot be tolerated, as it violates the spirit and reason behind introduction of the Code. Condemning such a behaviour, the Appellate Tribunal set aside the impugned order, released the Corporate Debtor from the rigours of CIRP and imposed a cost of INR 1,00,000 on the Operational Creditor.

Conclusion

The ruling of the Appellate Tribunal is in line with the observations of the Hon’ble Supreme Court^[1] in several cases, wherein it held that the aim of IBC is ensuring the revival of the Corporate Debtor rather than recovery of the debt owed to the creditors. In the present case, the conduct of the Operational Creditor showed a disingenuous intent and hence, the impugned order was rightly set aside.

^[1] Jaypee Kensington Boulevard Apartments Welfare Assn v. NBCC (India) Ltd. (2022) 1 SCC 401; HPCL Bio-Fuels Ltd. v Shahaji Bhaudas Bhad, 2024 SCC Online SC 3190.