[Vishesh and Bhabesh are students at National Law University Odisha.]
The Insolvency and Bankruptcy Code 2016 (Code) was formed with the intent to resolve default in payments and strive to revive the debtor by repaying a portion of the debt back to the creditor. In multiple cases such as Swastik Enterprises v. Gammon India Limited, Krishna Enterprises v. Gammon India Limited, and Govind Sales v. Gammon India Limited, the total amount has not been calculated fairly due to the absence of an explicit interest clause. Recently, in the case of Mr V Umadevi v. Kumarna Gin and Pressing Private Limited, the NCLT was stumped with the question of computing interest without an explicit clause and the same was not computed because the NCLT was not able to ‘determine’ the amount of interest.
In this article, the authors strongly argue in favour of computation of interest in absence of an agreement for the same. Through this piece, the authors aim to suggest how the computation of interest can be done in a case where the operational debt has been interpreted widely regardless of an explicit clause in an agreement allowing them to do so. The authors suggest placing reliance upon the Sales of Goods Act 1930 (Act) and treating the scenario as an agreement to sell to rectify these issues.
Purposive Interpretation of Operational Debt
Section 5(20) of the Code defines the operational creditor (OC) as "a person to whom operational debt is owed". The term 'operational debt' has been clearly defined under Section 5(21) of the Code as "a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force".
Here, it is pertinent to mention that the phrase "in respect of" before the phrase "provision of goods and services" gives rise to two potential interpretations. The first interpretation, which could be a narrow interpretation, indicates the phrase "in respect of" as denoting solely the provider's monetary claim against the corporate debtor (CD). The second interpretation, which could be a wide interpretation, expands the meaning of "in respect of" to encompass any claim, including that of the receiver of the goods and services. The aforementioned interpretations have clearly been observed in the case of Chipsan Aviation Private Limited v. Punj Llyod Aviation Limited (emphasis supplied).
The Supreme Court (SC), in the case of M/s Consolidated Construction Consortium Limited v M/s Hitro Energy Solutions Private Limited, by observing that “a purchaser of the goods or services, on occurrence of default on behalf of the CD, will also be considered as an OC”, has unequivocally rejected the contention supporting the narrow interpretation that excluded those individuals or entities who either received or were expected to receive goods and services from the CD. It further observed that a “claim” must have some connection with the “provision of goods and services” without explicitly stating the supplier or recipient. The aforementioned contentions have also been implicitly upheld in the case of Pioneer Urban Land and Infrastructure Limited v. Union of India.
Computing Interest: Considering the Act
In numerous instances, tribunals and courts have failed to compute the amount of interest owing to the absence of an explicit interest clause in the contract. However, previously in an agreement to sell, the courts have computed interest even in the absence of an express clause. The same has been observed in the case of M.K.M. Moosa Bhai Amin, Kota v. Rajasthan Textile Mills, where the court granted reasonable interest without any stipulation of interest in the agreement. In cases where ‘operational debt’ has been interpreted broadly, the agreement of delivering the goods on the basis of advance payment should be treated as an agreement to sell. It can be treated under the Act because as opposed to the strict statutory interpretation of operational debt wherein a contract of sale is not formed, it allows the advance payment given by a buyer to the seller in exchange for goods or services to be treated as an operational debt, which is an agreement to sell under Section 4 of the Act.
Section 61(2)(b) of the Act allows the court to award interest to the buyer on the amount paid if there is no agreement to the contrary. So, when it comes to a default in repayment, interest can be added to the total default amount when there is no agreement to the contrary. In the case of State Trading Corporation of India v. Tara Jewellers, the court awarded 6% interest to the buyer under Section 61(2)(b) of the Act without any specific clause pertaining to the rate of interest. Similarly, courts and tribunals have awarded 12% interest in cases like Stephen Chemical Limited v. Innosearch Limited and PK Vaduvammal v. Jaydev Constructions, respectively (emphasis supplied).
In the case of PK Vaduvammal v. Jaydev Constructions, it was held that Section 61 of the Act serves as a supplementary provision, rather than conflicting with any provisions of the Code. Its purpose is to allow for the payment of interest to operational creditors, a provision that is absent in the Code. Moreover, Section 66 of the Act states that insolvency rules will apply to the contracts for the sale of goods. With such an interplay of insolvency and contracts of sale of goods, the Act might be an option to compute interest in a case where an explicit clause of interest is not there. This will allow the Adjudicating Authority to function in an equitable and justifiable manner, respecting the objectives of the Code.
The courts and tribunals have always intended to award interest to ensure equity. In Dushyant Dalal v. SEBI, the SC allowed tribunals to award interest from the day the cause of action began to till the date the procedures for recovery of such interest in equity were commenced. Similarly, in Clariant International Limited and Another v. SEBI, the SC held that “interest can be awarded in terms of an agreement or statutory provisions. It can also be awarded by reason of usage or trade having the force of law or on equitable considerations.” Furthermore, tribunals have inherent powers to act in equity under Rule 11 of National Company Law Tribunal Rules 2016. As a result, interest may be added to the principal amount to determine the actual ‘operational debt’.
The Ramifications of Not Computing Interest: An Unleashing Chaos?
Computation of interest is a common practice in commercial transactions. It ensures that the creditor is adequately compensated for the period during which the debt remained unpaid. The tribunal by including interest would unequivocally promote fairness and discourages defaulters from exploiting the absence of a contractual provision on interest.
Without the computation of interest, there will be a dispute regarding the total outstanding amount owed to the OC. The CD will argue that the principal amount is the only amount payable, while the OC will contend that interest should also be included. This would clearly lead to further litigation and delays in the resolution process. If the OC disagrees with the NCLT's decision not to compute interest, they may initiate separate legal proceedings to recover the interest amount. This can result in multiple proceedings in different forums, such as civil courts or arbitration tribunals, further prolonging the resolution process and increasing legal complexities.
The aforementioned contentions have been laid in various cases i.e., PK Vaduvammal v. Jaydev Constructions; Devendra Kumar Jain v. Polar Forgings and Tools Limited; and Stephen Chemical Limited v. Innosearch Limited, where it was conjunctively held that “even in absence of an agreement between the parties as to the rate of interest, the tribunal can determine the reasonable rate of interest in order to avoid multiplicity of proceedings”.
Further, this delay in the recovery process for the OC by tribunal will indeed defeat the pivotal objective of the Code that is to expedite the resolution of debts in a time bound manner. And it will also defeat the legislative intent of Sections 61 and 66 of the Act.
Moreover, the exclusion of interest from the computation by the tribunal will definitely have a significant financial impact on the OC. Interest serves as compensation for the time value of money and the opportunity cost of delayed payment. Without interest, the OC may suffer financial losses and face difficulties in meeting their own financial obligations.
The adjudicating authorities can resolve a slew of concerns by considering the widely interpreted operational debt as an agreement to sell. Failure to compute interest in the absence of a specific provision may establish a negative precedent, discouraging the OCs from seeking resolution under code. The tribunal’s purpose should be to promote fairness throughout the resolution process. Even though the Code is not a debt collection instrument, the amount defaulted should be calculated equitably. A mechanism to compute interest is much needed as it violates the objectives of the Code by prolonging the resolution process. The Act seems to be a suitable statutory backing for computing interest when it comes to the default of widely interpreted operational debt due to the interconnection between the two legislations as seen in Section 66 of the Act.