Understanding the meaning of Financial Debt

The definition of Financial Debt under section 5(8) of the Insolvency and Bankruptcy Code, 2016 states that: "A debt along with interest, if any, disbursed against the consideration for the time value of money” and includes—

(a) money borrowed against the payment of interest; …”

However, if the Corporate Debtor commits a continuous default in making payment of interest when the principal amount is not due, under what provision of the IBC law will the Financial Creditor seek relief?

The ambiguity concerning the above was never addressed before and as a result, it raised concern over the grey area of the Insolvency and Bankruptcy Code, 2016.

To seek clarity on the ambiguity of the law, an Appeal was filed before the Hon’ble National Company Law Appellate Tribunal (‘NCLAT’) under section 61(1) of the Insolvency and Bankruptcy Code, 2016, against the order passed by the Hon’ble National Company Law Tribunal, New Delhi Bench-V, wherein the Ld. Adjudicating Authority held that the application which was filed under section 7 of the Insolvency and Bankruptcy code, 2016 read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 for the initiation of Corporate Insolvency Resolution Process in respect of the Respondent for defaulting in payment of interest for a sum of INR 2,39,80,274/- (Indian Rupees Two Crore Thirty-Nine Lakh Eighty Thousand Two Hundred and Seventy Four Only), is not maintainable u/s 7 of the Insolvency and Bankruptcy Code, 2016, on the ground that:

“There must be the existence of debt and only thereafter interest shall be added in the principal debt. As the Principal amount has not become due and payable as yet, therefore, there is no debt that is due and payable.

Accordingly, there is no default in making payment of the amount. Therefore, the only interest amount claimed by the applicant does not come under the definition of “Financial Debt”.

The question apprised before the Hon’ble National Company Law Appellant Tribunal was whether an application under Section 7 of the Code can be filed and maintained in respect of the component of interest which became due and payable without asking for the principal amount which has not yet become due and payable.

The Contentions put forth by the Appellant before the Hon’ble National Company Law Appellant Tribunal was that an application under Section 7 of the Code shall be maintainable even on the component of interest if it crosses the threshold limit being part of the financial debt. In this regard, it was submitted that the financial debt is a debt with interest if any, disbursed against the consideration for the time value of money and includes debentures. It is further submitted that the Hon’ble Supreme Court in the case of M/s Orator Marketing Pvt. Ltd. Vs. M/s Samtex Desinz Pvt. Ltd. Civil Appeal No. 2231 of 2021 has held that the interest-free loan is a financial debt and the application under Section 7 was held to be maintainable. It is submitted that on the same analogy the interest which became due and payable would attract the provisions of Section 7 of the Code.

The Hon’ble Bench of the National Company Law Appellant Tribunal interpreted the Parts of the Insolvency and Bankruptcy Code, 2016, by stating the definitions of Debt, Default, Claim, Financial Creditor, and Corporate Debtor. Further stated that it is an undisputed fact that the interest was due and payable by the Corporate Debtor by referring to the Landmark Judgement of Innovative Industries Ltd. Vs. ICICI Bank, 2018 1 SCC 401 and M/s Orator Marketing Pvt. Ltd. (Supra) in favor of the Appellant and concluded in Company Appeal (AT) (Ins.) No. 882 of 2022 that the application filed under Section 7 of the Code could be maintained in respect of the component of interest itself which became due and payable, without asking for the principal amount which has not yet become due and payable.