The National Company Law Appellate Tribunal (NCLAT) has clarified that the interest component on financial debt, such as Inter Corporate Deposits (ICDs), forms an integral part of the claim threshold under Section 4 of the Insolvency and Bankruptcy Code (IBC). The judgment reverses the Adjudicating Authority's narrow interpretation, which excluded interest merely because it was supported by Tax Deducted at Source (TDS) deductions. The NCLAT emphasized that Section 5(8) of the IBC includes interest as part of financial debt, provided the debtor acknowledges the liability, as evidenced by correspondence and conduct.
Background & Facts
The Dispute
The appellant, Wild Dreams Trading Company Pvt. Ltd. (Financial Creditor), advanced Inter Corporate Deposits (ICDs) aggregating Rs. 2,32,00,000 to the respondent, Ascendancy Financial Services Pvt. Ltd. (Corporate Debtor), between 22.07.2016 and 18.07.2024. The parties orally agreed that the ICDs would carry interest at 11.50% per annum for financial years 2016-17 and 2017-18, later revised to 8% per annum. The Corporate Debtor repaid portions of the principal but failed to pay any accrued interest, leading to an outstanding principal of Rs. 62,00,000 and interest of Rs. 45,44,700 (net of TDS) as of 30.09.2024.
Key Facts
- Advances: Eleven ICDs disbursed between 22.07.2016 and 18.07.2024, totaling Rs. 2,32,00,000.
- Interest Agreement: Oral agreement for 11.50% interest (later revised to 8%), corroborated by TDS deductions.
- Repayments: Corporate Debtor repaid principal amounts of certain ICDs but no interest was paid.
- Outstanding Amount: Rs. 62,00,000 (principal) + Rs. 45,08,010 (interest) = Rs. 1,07,08,010 as of August 2024.
- TDS Deductions: Corporate Debtor deducted and deposited TDS on interest, acknowledging liability.
Procedural History
- 13.09.2024: Financial Creditor issued a Demand Letter for Rs. 1,07,08,010 (principal + interest).
- 19.09.2024: Corporate Debtor acknowledged the debt in writing and sought a two-week extension for repayment.
- 08.10.2024: Second Demand Letter issued; Corporate Debtor again sought extension citing financial difficulties (10.10.2024).
- 21.12.2024: Financial Creditor filed CP (IB) No. 335 of 2024 under Section 7 IBC before NCLT, Chandigarh.
- 03.02.2026: NCLT dismissed the application, holding that interest could not be included based on TDS deductions alone, and the default amount (Rs. 62,00,000) fell below the Section 4 threshold.
- Present Appeal: Financial Creditor challenged the NCLT order before NCLAT.
Relief Sought
The appellant sought:
- Admission of the Section 7 application for initiation of Corporate Insolvency Resolution Process (CIRP).
- Recognition of the total outstanding debt (Rs. 1,07,08,010), including interest, as exceeding the Section 4 threshold.
- Reversal of the NCLT order dated 03.02.2026.
The Legal Issue
The central question was whether the interest component on financial debt, supported by TDS deductions and acknowledgment by the Corporate Debtor, could be included in calculating the threshold under Section 4 of the IBC for initiating CIRP under Section 7.
Arguments Presented
For the Appellant
- Financial Debt Definition: Relied on Section 5(8) IBC, which defines financial debt as including interest, to argue that the total outstanding amount (principal + interest) should be considered.
- Acknowledgment of Debt: Emphasized the Corporate Debtor's letter dated 19.09.2024, which acknowledged the total debt of Rs. 1,07,08,010 and sought time for repayment.
- TDS Deductions: Argued that TDS deductions on interest constituted admission of liability and corroborated the oral agreement.
- Threshold Calculation: Contended that the NCLT erred by excluding interest, as the Section 4 threshold must be calculated based on the total financial debt, not just the principal.
For the Respondent
- The respondent did not appear before the NCLAT, and the appeal proceeded ex parte.
The Court's Analysis
The NCLAT examined the scope of Section 7 IBC, which requires the Adjudicating Authority to satisfy itself of:
- Existence of financial debt;
- Occurrence of default; and
- Completeness of the application.
The Tribunal emphasized that Section 5(8) IBC expressly includes interest as part of financial debt, provided it is disbursed against consideration for the time value of money. The Court observed:
"The expression itself makes it clear that where interest forms part of the agreed financial arrangement between the parties, such interest cannot be artificially separated while determining the amount of financial debt. The legislative intent behind Section 5(8) is to include the complete financial obligation arising from a transaction involving time value of money and not merely the original principal amount advanced."
The NCLAT analyzed the correspondence between the parties and held that the Corporate Debtor's letter dated 19.09.2024 constituted a clear acknowledgment of liability, including both principal and interest. The Tribunal noted:
"The response of the Corporate Debtor to the aforesaid Demand Letter assumes significance. By its Reply dated 19.09.2024, the Corporate Debtor did not dispute either the amount claimed or the liability towards payment of interest. On the contrary, the Corporate Debtor stated that it was in the process of arranging funds for repayment of the amount of Rs.1,07,08,010/- and requested a period of two weeks for making the payment. The said communication amounts to a clear acknowledgment of the outstanding liability comprising both principal and interest components."
The Court further held that TDS deductions, while not conclusive by themselves, formed part of the cumulative evidence establishing the interest liability. The NCLAT criticized the NCLT for isolating one piece of evidence (TDS deductions) while ignoring other material documents, such as:
- The Demand Letter dated 13.09.2024;
- The Corporate Debtor's acknowledgment dated 19.09.2024;
- The calculation of interest placed on record;
- The absence of any dispute regarding the interest liability in contemporaneous communications.
The Tribunal also addressed the absence of a written agreement for interest, holding that:
"The payment of interest was based on the mutual oral arrangement between the parties, which stood corroborated by the calculation of interest, deduction and deposit of TDS on such interest, and the subsequent communications exchanged between the parties acknowledging the outstanding liability. Thus, the interest component claimed by the Financial Creditor cannot be treated as a unilateral claim unsupported by material evidence."
The NCLAT distinguished the present case from mere recovery proceedings, noting that the Corporate Debtor had:
- Availed ICD facilities;
- Made repayments towards principal;
- Acknowledged the outstanding debt (including interest); and
- Sought time for repayment.
These factors established the existence of financial debt and occurrence of default under the IBC.
The Verdict
The NCLAT allowed the appeal and set aside the Impugned Order dated 03.02.2026 passed by the NCLT, Chandigarh. The Tribunal held that the total outstanding financial debt (Rs. 1,07,08,010) exceeded the threshold under Section 4 IBC, warranting initiation of CIRP. The Corporate Debtor was directed to make full payment of the outstanding debt along with interest within 15 days from the date of the order. In case of failure, the Adjudicating Authority was directed to admit the Section 7 petition and initiate CIRP proceedings. No costs were awarded.
What This Means For Similar Cases
Interest Component Forms Part of Financial Debt Under Section 5(8) IBC
- Statutory Interpretation: Section 5(8) IBC explicitly includes interest as part of financial debt. Financial creditors can rely on this provision to argue that interest accrued on loans, ICDs, or other financial facilities must be included in calculating the Section 4 threshold.
- Oral Agreements: The absence of a written agreement for interest does not preclude its inclusion, provided there is corroborative evidence (e.g., TDS deductions, acknowledgment letters, repayment conduct).
Acknowledgment of Debt is Crucial for Establishing Liability
- Evidentiary Value: A written acknowledgment of debt (including interest) by the Corporate Debtor is strong evidence of liability. Financial creditors should ensure such acknowledgments are unambiguous and contemporaneous.
- TDS Deductions: While TDS deductions alone may not suffice, they corroborate the existence of an interest liability when combined with other evidence (e.g., demand letters, calculations, correspondence).
Adjudicating Authority Must Consider Cumulative Evidence
- Holistic Approach: The NCLT erred by focusing solely on TDS deductions while ignoring other material documents. Adjudicating Authorities must examine the entire transaction, including:
- Demand letters;
- Acknowledgment of debt;
- Repayment history;
- Conduct of parties (e.g., TDS deductions); and
- Absence of disputes in contemporaneous communications.
- Threshold Calculation: The Section 4 threshold must be calculated based on the total financial debt, not just the principal amount. Excluding interest without valid grounds violates Section 5(8) IBC.
