Not Adding Interest To The Principal To Arrive At Threshold Of Rs.1 Crore ; A Critique On CBRE V. United Concepts Decision

The NCLT examined various provisions of the Code, particularly the definition of "operational debt" in Section5(21) and "financial debt" in Section5 (8) and inferred that "interest" can be claimed as a financial debt but there is no provision or scope "to include the interest" to constitute operational debt. Reliance was placed on the decision of the Chandigarh Bench of the NCLT in M/s.Wanbury Ltd. Vs. M/s. Panacea Biotech Ltd. ("Wanbury") to support its findings. The application of the operational creditor was thus rejected. The object of this column is to critically examine whether the view of the NCLT in CBRE.

There are two (2) reasons why the view taken by the NCLT in CBRE is incorrect. They are as follows:

A.Non consideration of the earlier judgment of the National Company Law Appellate Tribunal

The NCLT did not notice the judgment of the National Company Law Appellate Tribunal ("NCLAT") delivered on 27^th July 2018 in Krishna Enterprises v. Gammon India Ltd. ("Krishna Enterprises" ) in which the NCLAT had held, "…If in terms of any agreement interest is payable to the Operational or Financial Creditor then debt will include interest, otherwise, the principle [sic] amount is to be treated as the debt which is the liability in respect of the claim which can be made from the Corporate Debtor." It is pertinent to note the decision of the NCLAT was challenged before the Supreme Court in a batch of appeals which were dismissed in 2019, thereby confirming the judgment of the NCLAT. "The principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities." (See Union Of India And Others v.Kamlakshi Finance Corporation). Therefore, the NCLT in CBRE could not have taken a view contrary to the NCLAT in Krishna Enterprises. Though the NCLT in CBRE has placed reliance on the Chandigarh Bench judgment in Wanbury, in the facts of Wanbury, the invoices filed along with the winding up petition did not contain any clause for payment of interest. Notwithstanding this distinction, the view taken by the NCLAT Krishna Enterprises on this issue would prevail over the view taken by the Chandigarh Bench in Wanbury and would thus be binding on all the Benches of the NCLT.

B. Differential treatment between corporate debtors

1,With the onset of COVID-19 and the Nation-wide lockdown, on 24^th March 2020, the Ministry of Corporate Affairs, issued a notification under Section 4 of the Code by which the Union Government increased the minimum amount of default to Rs. 1 Crore. Therefore, CIRP could only be initiated under the Code if the default amount was Rs. 1 Crore or more. As was obvious, purpose of the notification was to ensure that Small and Medium Enterprises (SMEs and MSMEs) were not "subjected to Insolvency proceedings during the lockdown or immediately thereafter." (see the interim order in Pankaj Aggarwal v. Union ofIndia and others). But the suggestion to increase the minimum threshold was mooted even before COVID-19 in the Report of the Insolvency Law Committee ("ILC) of 20^th February 2020. The ILC stated that "due to the low threshold of default" of Rs. 1 Lakh "many applications were being filed for initiation of CIRP" which "led to an increased burden" on the Adjudicating Authority. Therefore, a need to review the minimum default threshold for admitting a case under Section 4 of the Code was mooted and the ILC recommended increasing the minimum threshold to Rs. 50 lakhs. However, it was considered necessary to provide certain exemptions to the MSME sector and accordingly, it was recommended that operational creditors should be allowed to have recourse to CIRP on a minimum default of Rs. 5 lakhs. However, the Union Government must have felt that to protect MSME's from CIRP during COVID-19, increasing the minimum threshold to Rs. 1 Crore was the most suitable recourse. The Union Government as a result brought in a uniform minimum threshold of Rs. 1 Crore as against the suggestion of the ILC to have a lower threshold for operational creditors. Thus, the minimum threshold of Rs. 1 Crore applies across the board to all types of CIRP initiated by both operational creditors and financial creditors under the Code.

2,On the backdrop of what is mentioned above, one needs to closely examine the reasoning of the NCLT in CBRE. The NCLT principally relied on the definitions of financial and operational debt in the Code. While financial debt means "debt along with interest", operational debt does not include interest within the definition. While there is no dispute that a financial creditor would stand on a different footing from an operational creditor (as held by the Supreme Court in Swiss Robbins Private Limited andanother v. Union of India and others), the NCLT has applied a different yardstick for operational creditors versus financial creditors "to arrive at the minimum threshold of Rs.1 Crore." This can be enunciated with an example: Say for instance there are two proceedings filed at the NCLT. One filed by a financial creditor under Section 7 of the Code against a corporate debtor (Case-A) and the other by an operational creditor under Section 9 against another corporate debtor (Case-B). The principal amount due and payable in both Case -A and Case-B is Rs. 90 lakhs. In both cases, there are agreements that provide for interest which has admittedly not been paid by the corporate debtor. Further, in both Case-A and Case-B, the total interest due and payable is Rs. 20 lakhs thereby increasing the total outstanding to Rs. 1.10 Crores which is above the minimum threshold of Rs. 1 Crore. However, if the reasoning of the NCLT were to be adopted, the CIRP proceedings would be maintainable in Case-A by the financial creditor, but not by the operational creditor in Case-B. This, it is submitted would result in differential treatment amongst both corporate debtors in Case-A and Case-B and this differential treatment would be violative of Article 14 of the Constitution of India, 1950. There is always presumption in favour of the constitutionality of a provision and therefore, the NCLT could not have adopted a line of reason which would result in unconstitutionality. Further, the reasoning of the NCLT would also be at odds with the intent of the Union Government to increase the minimum threshold to a uniform figure of Rs. 1 Crore. If the intention was to have two different thresholds for financial and operational creditors, the Union Government would have done so; but that is not the case.

Therefore, for the reasons set out above, the view taken by the NCLT in CBRE is not correct. It would however be prudent for the law makers to either issue a notification clarifying its position on the matter or for the Legislature to introduce an amendment to the Code by including interest arising out of an agreement between parties within the meaning of operational debt in Section 5(21) of the Code.