By Sati Mukund
For operational creditors, the math behind filing an insolvency petition under the Insolvency and Bankruptcy Code (IBC) often seems straightforward: Principal + Interest = Total Debt. However, a recent ruling by the National Company Law Appellate Tribunal (NCLAT) in Shivani Enterprises v. S Square Cargo Movers Pvt. Ltd. has sent a clear and cautionary message: interest cannot be assumed unless it is agreed contractually.
This decision is not just another procedural ruling as it reshapes how businesses should document commercial terms. Lenders must ensure that they not only rely on invoice-based terms to stand up in insolvency proceedings. This ruling reinforces why that approach must change.
The Background: A Race to the Threshold
Under the Insolvency and Bankruptcy Code, an operational creditor must establish a minimum default of ₹1 crore to initiate the Corporate Insolvency Resolution Process (CIRP).
In this case, Shivani Enterprises (the Operational Creditor) filed a Section 9 application against S Square Cargo Movers (the Corporate Debtor). While the principal amount owed for goods supplied was significant, it fell short of the statutory threshold. To bridge the gap and surpass the ₹1 crore minimum requirement, the creditor added a substantial amount of interest based on terms printed on their invoices.
The Core Conflict: Can Invoices be relied upon as agreement?
The Corporate Debtor challenged the application, arguing that they never agreed to pay interest. They contended that the interest was a unilateral addition by the creditor and, therefore, the "debt" was actually below the legal limit for insolvency. This raised a fundamental legal question of whether invoice-based terms can be considered as “operational debt” under the IBC without explicit acceptance.
The NCLAT’s Verdict: Substance over Form
The Tribunal agreed with the arguments of the Corporate Debtor, dismissing the insolvency plea. The court’s reasoning provides three vital lessons on operational debt:
- Contract Overrides Invoices: The NCLAT held that interest cannot be considered part of "operational debt" unless there is a clear and mutual contractual agreement between the parties. Simply printing an interest clause on an invoice does not constitute a "meeting of minds" if the debtor hasn’t signed off on it.
- The "Pre-Existing Dispute" Rule: Because the interest was not mutually agreed upon, the debtor’s refusal to pay it was viewed as a legitimate, pre-existing dispute. Under the IBC, if a dispute exists regarding the debt, a Section 9 application must be rejected.
- Contractual rights: The Tribunal clarified that only contractual or agreed obligations can constitute debt and unverified interest claims to artificially meet the ₹1 crore threshold is not acceptable.
Key Takeaways
This ruling reinforces a broader principle that the IBC is not a debt recovery tool for contested claims. Instead, it is a resolution mechanism for clear and undisputed defaults.
- For Trade Creditors: Ensure your Purchase Orders (POs) or Master Service Agreements (MSAs) explicitly mention the interest rate for delayed payments. Relying solely on small print T&Cs on invoice footers or overleaf does not constitute an agreed debt.
- For Lenders to the Trade Creditors: Ensure that payment of default interest is agreed with the debtor by the trade creditor by way of a written document / agreement to enforce before a court of law.
Final Thought
The Shivani Enterprises case reinforces that the IBC is not a recovery forum for disputed claims. It is a resolution process for undisputed, clear defaults. If you want your interest to count, get it in a signed contract.