Claiming Interest in Insolvency: Analysis of M/s Vedic Projects Pvt. Ltd. Vs. Sutanu Sinha on MSME Entitlements

Introduction:

The judgment in Vedic Projects Pvt. Ltd. Vs. Sutanu Sinha by the National Company Law Appellate Tribunal (NCLAT) marks a pivotal moment in insolvency jurisprudence. The case examines the interplay between the Insolvency and Bankruptcy Code (IBC) and the Micro, Small, and Medium Enterprises Development (MSMED) Act, specifically addressing whether statutory interest claims under the MSMED Act can be included as operational debt in a Corporate Insolvency Resolution Process (CIRP). This ruling reaffirms the necessity of explicit contractual provisions for claims in insolvency proceedings, emphasizing the limits of resolution professionals' authority and the distinct purposes served by insolvency laws and statutory entitlements.

Background

The dispute arose between Vedic Projects Pvt. Ltd., an MSME, and Simplex Projects Ltd., the Corporate Debtor, over unpaid amounts under a subcontract agreement executed in 2010. While the Appellant raised claims for approximately ?41.53 crores for completed construction work, the Corporate Debtor paid only a portion, leaving ?10.36 crores unpaid.

The Appellant, relying on its status as an MSME, claimed an additional ?13.05 crores as interest under Section 16 of the MSMED Act. The Resolution Professional (RP) admitted the principal claim but rejected the interest component, citing the subcontract's lack of an interest clause. Dissatisfied, the Appellant approached the NCLT, which upheld the RP's decision, stating that interest claims under the MSMED Act could not be adjudicated in insolvency proceedings. The Appellant then appealed to the NCLAT.

Questions of Law

1. Definition of Operational Debt: Does operational debt under Section 5(21) of the IBC encompass statutory interest claims under the MSMED Act?
2. Applicability of MSMED Act: Can statutory rights under the MSMED Act be enforced within the CIRP framework under the IBC?
3. Resolution Professional's Scope of Authority: To what extent can an RP reject claims based on statutory provisions outside the scope of the IBC?
4. Role of Contractual Provisions: Are interest claims valid in insolvency proceedings without express provisions in the agreement?

Findings and Rationale

1. Operational Debt and Interest Claims The NCLAT clarified that operational debt under Section 5(21) of the IBC pertains to claims arising from goods, services, or statutory dues directly tied to the debtor's liability. The tribunal held that interest claims, unless explicitly agreed upon in a contract, do not qualify as operational debt. Citing Krishna Enterprises Vs. Gammon India Ltd., the NCLAT reiterated that debt inclusivity hinges on contractual terms. The rejection of interest claims was consistent with the subcontract, which lacked any provision for interest on delayed payments.
2. Exclusion of MSMED Act Claims from CIRP The tribunal emphasized that the MSMED Act, while beneficial for MSMEs, does not supersede the IBC in insolvency proceedings. Claims for interest under Section 16 of the MSMED Act must be pursued in appropriate forums, as the NCLT’s jurisdiction under the IBC is confined to resolving insolvency matters. This decision aligns with the principle that the IBC aims to resolve debts efficiently without being burdened by ancillary claims.
3. Authority of Resolution Professionals The NCLAT upheld the RP’s administrative role, highlighting that RPs are bound to verify claims strictly based on contractual and statutory frameworks relevant to the IBC. The RP’s decision to reject interest claims due to their absence in the subcontract agreement was deemed appropriate and within their mandate under the CIRP Regulations.
4. Primacy of Contractual Provisions The tribunal emphasized the importance of explicit contractual terms in insolvency claims. In the absence of an interest clause, the subcontract limited the Appellant's entitlement to the principal amount. The NCLAT reaffirmed that insolvency proceedings cannot accommodate claims for interest without express contractual or statutory support linked to the IBC.
5. Appropriate Forum for MSMED Act Claims Addressing the Appellant’s reliance on Section 16 of the MSMED Act, the NCLAT noted that the MSMED Act provides a specific mechanism for enforcing interest claims, which cannot be conflated with the IBC’s objectives. The tribunal directed MSME claimants to pursue such statutory rights outside the insolvency process.

Conclusion

The NCLAT’s decision in Vedic Projects Pvt. Ltd. Vs. Sutanu Sinha underscores the boundaries of the IBC in addressing claims unrelated to its core objectives. By delineating the role of resolution professionals and the scope of operational debt, the judgment safeguards the integrity of insolvency proceedings. It also reaffirms that statutory rights under laws like the MSMED Act must be enforced through designated forums, ensuring that CIRP remains focused on resolution and restructuring.

This judgment serves as a critical reminder for MSMEs to ensure explicit contractual provisions for interest or additional claims to avoid disputes during insolvency. It highlights the need to navigate the intersection of specialized statutes and insolvency laws carefully, preserving the distinct roles each serves in the broader legal landscape.