The National Company Law Appellate Tribunal (NCLAT) at Delhi has recently declined to recognise an interest claim on delayed payment of CIRP dues founded solely on a circular issued by the Indian Cotton Association Limited.
The bench of Judicial Member Justice Mohd Faiz Alam Khan and Technical Member Indevar Pandey found no recognition of such authority by the Insolvency and Bankruptcy Code, 2016 (IBC) or by the Insolvency and Bankruptcy Board of India (IBBI) or as a legislation-making body under any enactment.
The bench observed,
“ …the appellant has failed to show the authority of the above Association to set any practice or procedure and also the precedent in this regard, particularly if it is a legislation making body under any enactment or recognized by the IBBI or has any mention in the IBC..
..we also do not want to take any different view what has been taken by the Ld. Adjudicating Authority and in our considered view also, the appellant cannot take any benefit of this circular, in absence of any Statutory authority conferred on the Association to issue a circular of this nature.”
The appeal was filed by the Operational Creditor, Parkash Cotton Pressing Factory, against an order of the Chandigarh Bench of the National Company Law Tribunal (NCLT) rejecting the operational creditor's claim for interest on payments allegedly delayed during the Corporate Insolvency Resolution Process (CIRP) and liquidation of the Corporate Debtor.
The Corporate Debtor was admitted into CIRP on 29 September 2017. The appellant had supplied cotton, a key raw material for the Corporate Debtor's textile manufacturing operations, both before and during the insolvency process.
Its pre-CIRP claim of over Rs 3 crore had been admitted by the Resolution Professional (RP). During the CIRP, the appellant continued supplying raw materials upon assurances that such supplies would be treated as CIRP costs and paid on priority. Later, the Corporate Debtor's liquidation was approved on 8 August 2018.
Substantial amounts remained unpaid for supplies made during the CIRP and liquidation periods. Subsequently, multiple applications were filed before the NCLT seeking release of the outstanding dues, priority treatment of the claims and interest on the amount which was due.
In the meantime, a special audit was directed at the instance of the financial creditors to verify CIRP and liquidation costs. The auditor ultimately determined that Rs 6.95 crore was payable to the appellant towards supplies made during the insolvency process. The NCLT subsequently directed payment of the amount in December 2023 and the same was released. However, the application seeking payment of interest was rendered as infructuous.
The appeal was preferred, but the NCLAT remanded the matter to the NCLT and the NCLT dismissed the said application, prompting the present appeal.
The appellant pointed out that the amount had remained unpaid for nearly five years even though the supplies constituted CIRP costs entitled to priority as recognised by the NCLT. It was argued that the appellant is therefore entitled to interest for this period. The appellant relied on a circular issued by the Indian Cotton Association which provides interest at the rate of 1.40 % per month for delayed payment on supplied cotton.
Further, it was argued that the undertaking relied by the NCLT for rejecting the appellant's application was given under coercion and financial duress. It was also argued that the Corporate Debtor's own ledger reflects that the amount payable to the applicant had remained deposited and had actually earned interest.
The liquidator submitted that the audit process had identified the appellant's entitlement. It was further argued that the application for interest was merely an afterthought and a mala fide attempt to extort money from the Corporate Debtor.
It was also pointed out that none of the invoices issued by the appellant contained any clause providing for interest on delayed payment. The liquidator also relied upon the undertaking executed by the appellant, wherein it acknowledged receipt of Rs 6.95 crore in full and final settlement and agreed not to pursue further proceedings concerning the claim.
The Bench noted that the appellant had never challenged the auditor's determination and that the audited amount had been computed substantially on the basis of information supplied by the operational creditors themselves. The Tribunal also found that there was no contractual stipulation in any invoice requiring payment of interest, nor was any separate agreement produced to support the claim.
The NCLAT also rejected reliance on the Indian Cotton Association circular, observing that the document did not demonstrate statutory backing. It was also noted that the circular neither bore any date, reference number, nor signature and that the circular lacked recognition under either the IBBI or IBC. The Bench held that the appellant cannot rely on such a circular in the absence of any statutory authority conferred on the Association to issue a circular of this nature.
The Bench further noted that the undertaking executed by the appellant after the audit amounted to an acceptance of the determined amount in full and final settlement. Finding no evidence of coercion or financial duress, the Bench ruled that the undertaking operated as an estoppel against any further monetary claim arising from the supplies made to the Corporate Debtor.
Accordingly, the Bench upheld the order of the NCLT and dismissed the appeal.
For Appellants: Senior Advocate Vaibhav Gaggar with Advocate Sajal Dhanija, Gaurav Sehgal, Ketan Saraf, Prince Assal & Deepak Kapoor
For Respondents: Advocate Atul V. Sood, for Liquidator; Advocate Himanshi Garg for R3