M/s Vedic Projects Pvt. Ltd. vs. Shri Sutanu Sinha
Case Reference: Company Appeal (AT) (Insolvency) No.1927 of 2024
Judgment Date: 12/11/2024
Facts
The case concerns an appeal filed by M/s Vedic Projects Pvt. Ltd. (Operational Creditor) challenging the decision of the NCLT and the Resolution Professional (RP) during the Corporate Insolvency Resolution Process (CIRP) of M/s Simplex Projects Ltd. (Corporate Debtor). CIRP was initiated against the Corporate Debtor on 27.04.2022 following an application by the State Bank of India, with the Interim Resolution Professional (IRP) making a public announcement on 29.04.2022.
The Appellant claimed a total of Rs.23,42,42,554/-, including interest, for unpaid bills arising out of a subcontract for constructing the Kabrai Feeder Channel. Initially, the RP admitted Rs.2,76,67,940/-, which was later revised to Rs.10,36,30,064/- following supplementary submissions. However, the RP rejected the claim for interest, citing the absence of an interest clause in the Sub-contract Agreement. Being an MSME, the Appellant invoked Section 16 of the MSMED Act to claim interest on delayed payments, but the NCLT rejected its application, leading to the present appeal before the NCLAT.
Contentions
Appellant’s Contentions
The Appellant argued that as an MSME, it was entitled to interest on delayed payments under Section 16 of the MSMED Act. It also claimed that the Corporate Debtor had withheld payments since 2016, causing financial hardship.
Respondent’s Contentions
The Respondent contended that the Sub-contract Agreement did not include any clause for interest on delayed payments, and therefore, no such claim could be admitted. It was further argued that the RP’s role was limited to admitting claims as per the terms of the agreement, and the RP could not allow interest beyond the scope of the contractual provisions.
NCLAT’s Analysis and Observations
The NCLAT carefully examined the terms of the Sub-contract Agreement and related submissions. The tribunal emphasized that the agreement did not provide for payment of interest on delayed payments. As such, the RP acted correctly by admitting only the principal amount and rejecting the claim for interest.
The tribunal also observed that while the MSMED Act grants MSMEs a statutory right to interest on delayed payments under Section 16, the NCLT is not the appropriate forum for adjudicating such claims. Instead, these claims must be pursued before the relevant statutory authorities under the Act. The tribunal clarified that insolvency forums are bound by the terms of agreements and applicable insolvency laws, limiting their scope to contractual entitlements.
The RP’s role, the tribunal noted, is administrative and facilitative. It does not extend to admitting claims that are not explicitly provided for in the underlying agreement. Admitting interest, in this case, would have exceeded the RP’s mandate, which is restricted to claims based on valid contractual and statutory rights.
Judgment
The NCLAT upheld the decision of the NCLT, ruling that no interest can be claimed unless explicitly provided for in the agreement. It further stated that while the MSMED Act provides rights to interest, such claims cannot be enforced through insolvency proceedings. Consequently, the appeal was dismissed.
Analysis and Key Takeaways
Importance of Agreement Terms
The case underscores that claims in insolvency proceedings are governed by the terms of the underlying agreement. Without a clause for interest in the Sub-contract Agreement, the Appellant had no enforceable right to claim interest as part of its operational debt. This highlights the need for operational creditors to ensure that agreements are comprehensive and address all potential claims, including interest on delayed payments.
Limited Scope of RP’s Role
The tribunal reiterated the RP’s limited administrative role during CIRP. The RP is confined to admitting claims as per the terms of the agreement and applicable laws. Allowing interest without a contractual basis would go beyond the RP’s remit. This serves as a reminder for creditors to rely on well-drafted agreements to protect their claims.
MSMED Act Claims
Although the MSMED Act provides a statutory right to interest for MSMEs under Section 16, the tribunal clarified that such claims must be pursued before designated authorities under the Act. Insolvency forums like the NCLT are not appropriate for adjudicating these claims, marking a clear separation of forums for statutory and contractual remedies.
Broader Implications for MSMEs
The judgment has significant implications for MSMEs involved in insolvency proceedings. MSMEs must explicitly include clauses for interest on delayed payments in their contracts. Without such safeguards, they may recover only the principal amount during CIRP. Furthermore, MSMEs should carefully select the appropriate forum for pursuing statutory benefits under laws like the MSMED Act to avoid rejection of their claims.
Conclusion
This case reaffirms that insolvency resolution is a process primarily governed by contractual and statutory provisions. Creditors, particularly MSMEs, must craft precise agreements to protect their rights, especially regarding interest on delayed payments. While the MSMED Act offers important protections, these rights must be enforced through designated statutory mechanisms, not insolvency forums. This judgment serves as a crucial reminder of the importance of meticulous contract drafting and understanding the jurisdictional limitations of various legal forums.
