Principal Amount Paid In Full, Section 9 Application Not Maintainable For Recovery Of Interest: NCLAT Delhi

Background Facts

Shubh Aluminium Pvt. Ltd. (“Corporate Debtor”) had placed purchased orders with M/s. Hind Chem Corporation (“Operational Creditor”). The purchase orders did not mention anything pertaining to payment of interest in case of delayed payment. The Operational Creditor raised invoices against the purchase orders which remained partially unpaid.

Therefore, the Operational Creditor filed an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), seeking initiation of the Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor, over a default of Rs. 15,10,151/-.

The amount in default included principal amount of Rs. 9,97,122/- and interest component of Rs. 5,13,029/-. The interest was claimed by the Operational Creditor on the basis of invoices, which mentioned that delayed payment would attract 21% interest. However, these invoices were never signed by the Corporate Debtor.

During the pendency of the Section 9 application, the Corporate Debtor paid the principal amount of Rs. 9,97,122/- to the Operational Creditor on 06.01.2021. Subsequently, on 31.08.2022 the Adjudicating Authority initiated CIRP against the Corporate Debtor.

The Corporate Debtor filed an appeal before NCLAT against the Order dated 31.08.2022. The Corporate Debtor argued that CIRP could not have been initiated upon the interest amount alone, based on a unilateral document (invoice) of the Operational Creditor and which has not been signed by the Corporate Debtor.

NCLAT Verdict

The Bench relied on the NCLAT judgment in Permali Wallace Pvt. Ltd. Vs. Narbada Forest Industries Pvt. Ltd., Company Appeal (AT) (Ins) No. 36 of 2023, wherein the Bench had rejected an application filed solely for recovery of balance interest mount and not for resolution of the Corporate Debtor’s insolvency.

Further reliance was placed on Karnataka High Court judgment in Jyothi Limited Vs. Boving Fouress Limited, Company Petition No. 48 of 1998, wherein it was held that interest cannot be claimed over an invoice which is a unilateral document, unless it is signed by the parties.

“Before parting, we are constrained to observe that the Adjudicating Authority has erred in not looking into the facts that the principal amount has entirely been paid and the issue was only regarding to interest for which the application under Section 9 of the Code was not maintainable as the spirit of the legislation of the Code is for ‘resolution of debt’ and not for ‘recovery’.”

The Bench held that an application under Section 9 of IBC would not be maintainable for interest amount alone, when the principal amount has been paid in full, since the objective of IBC is resolution and not recovery. The Bench set aside the order dated 31.08.2022.

Case Title: Rohit Motawat v Madhu Sharma

Case No.: Comp. App. (AT) (Ins) No. 1152 of 2022

Counsel for Appellant: Mr. Prateek Gupta, Mr. Nikhil Saini, Advocate.

Counsel for Respondent: Mr. Mitul Jain and Mr. Ravindra Chaingale, Advocate for R-1.

Click Here To Read/ Download Order