MSME Interest Cannot Be Claimed To Trigger Threshold Limit Under IBC If MSME Certificate Obtained Post Appointed Date: NCLT Mumbai

Background Facts

SHAARC Projects Limited (“Operational Creditor”) supplied goods and rendered construction related services as per work orders issued by Hindustan Construction Company (“Corporate Debtor”). The Operational Creditor raised various sales bills against the Corporate Debtor during the years 2012-2014 and 2014-2015.

The Operational Creditor filed an application under section 9 of the Code read with rule 6 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (“Rules”) to initiate Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor. The Operational Debt claimed was of Rs. 1,15,95,819 which included the principal amount and MSMED Interest.

It contended that MSME interest can be claimed even though it was not included in the invoices by relying on the provisions of MSMED Act, 2006 including section 15, 16 and 17. Relying on a Notification issued by the Ministry of Corporate Affairs on 2 November 2018, it further argued that since MSMED Interest is as per statute it has to be included by the Buyer irrespective of whether the same has been included in the invoice or not. Therefore, it submitted that the interest needs to be included in the application under section 9 of the Code.

The Corporate Debtor argued that the application is not maintainable as the Operation Creditor has incorrectly clubbed MSMED Interest along with the Principal amount to meet the threshold under the Code. It further argued that the interest under the MSMED Act has to be calculated from the appointed date which, in the case, falls between 2013 and 2014. However, the Operational Creditor was registered as a MSME only in 2017. Therefore, the Corporate Debtor cannot charge MSMED interest for a period when it was not registered as an MSME.

NCLT Verdict

The NCLT relied on the decisions in Govind Sales v. Gammon India and Teknow Consultants & Engineers Pvt. Ltd. v. Bharat Heavy Electricals Limited and noted the principle therein that interest cannot be claimed due to lack of proper agreement between the parties. It held that there exists no explicit agreement or clause in the bills or invoices that would entitle the Operational Creditor to claim interest.

It also noted that the Operational Creditor had relied on a judgment of the Delhi High Court in M/s Ramky Infrastructure Private vs Micro and Small Enterprises to argue that Private Limited Companies are not required to file the Memorandum under section 8(1) of the MSMED Act to qualify as a “supplier” under section 2(n) of the MSMED Act.

However, the NCLT rejected the contentions of the Operational Creditor by relying on the decision of the Supreme Court of India in Silpi Industries Etc. v. Kerala State Road Transport Corporation and Another (2021 SCC Online SC 439) where it opined that:

“26. In our view, to seek the benefit of provisions under MSMED Act, the seller should have registered under the provisions of the Act, as on the date of entering into the contract. In any event, for the supplies pursuant to the contract made before the registration of the unit under provisions of the MSMED Act, no benefit can be sought by such entity, as contemplated under MSMED Act…

If any registration is obtained, same will be prospective and applies for supply of goods and services subsequent to registration but cannot operate retrospectively. Any other interpretation of the provision would lead to absurdity and confer unwarranted benefit in favor of a party not intended by legislation.”

It also relied on the NCLT decision in CBRE South Asia (P) Ltd. v. United Concepts and Solutions (P) Ltd. where it held that the interest sum cannot be combined with the principal amount to reach the threshold of one crore rupees.

In conclusion, the NCLT rejected the application filed by the Operational Creditor under section 9 of the Code as it had failed to establish the existence of an Operational Debt exceeding the prescribed threshold limit under section 4 of the Code due and payable by the Corporate Debtor but remaining unpaid.

Case Title: SHAARC Projects Limited v. Hindustan Construction Company Limited

Case No.: C.P. (I.B) No. 1077/MB/2021

Counsel for the Applicant: Adv. Kairav Trivedi

Counsel for the Respondent: Adv. Pawan Kulkarni and Adv. Darshit Dave i/b M/s. AVP Partners (PH)

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