In the matter of Reliance Capital Ltd- undergoing Corporate Insolvency Resolution Process, EPFO invested Rs. 2500 Crores  in Relaince Capital Ltd which had defaulted in the payment of interest since October, 2019 and the total defaulted interest on Non-Convertible debentures (Secured) amounted to Rs. 534.64 Crores.  A request was made by EPFO to the Labour Ministry, for it to take action to initiate CIRP against RCL. The question raised that there was no default on the payment of “principal amount as of date” since the maturity date of investment has not yet passed.

The matter was discussed at length in the light of following interpretation of the Code:

As per section 3(17) of the IBC, 2016 which defines the financial service providers as a person engaged in the business providing financial services in terms of an authorisation issued or registration granted by a financial sector regulator. In light of the above definition, Reliance Capital Limited falls under the purview of Financial Service Provider. Further section 3 (7) of the Code, excludes financial service providers from the definition of “Corporate Persons.” Moreover section 227 of the Code, a provision was made for conducting insolvency and liquidation proceedings in the category of financial service providers, in consultation with the appropriate  financial sectoral regulator. Invoking this power, the Central Government has notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 on 15th November, 2019.

Status of Wokers Money

In the instant case, Reserve bank of India, filed an application under section 227 read with section239(2)(zk) of the Code read with rule 5 & 6 of the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudication Authority) Rules, 2019 on the receipt of the intimation from the Yes Bank Limited. Further pursuant to the powers vested under section 45-IE of the Reserve Bank of India Act, 1934, RBI superseded the Board of Directors of Reliance Capital Ltd and appointed Mr. Nageswara Roa Y, as the administrator, who was the former Executive Director of the bank of Maharashtra, to exercise the powers and function of Insolvency Professional , Interim Resolution Professional, Resolution Professional or the Liquidator to carry out the insolvency and liquidation proceedings  of the financial service providers. In excercise of the powers conferred on him, Mr. Nageswara Rao Y made the public announcement in terms of the provisions of the Code, inviting claims from the financial and operational creditors. As the information available from the website of the CD, Mr Roa had initially admitted the claim of Rs. 3308.67 Crores as against the amount claimed which was 3338.75 Crores and the balance amount was kept for verification.

Financial Debt and the Concept of ‘Commercial Insolvency’ 

In the matter of Reliance Infocomm ltd Vs. Sheetal  Refineries Pvt Ltd, Andhra Pradesh High Court held that the words “unable to pay its dues “ as per section 433(e) of the Companies Act should be taken in the commercial sense, which means the Court must be satisfied that the existing and probable assets would be insufficient to meet its existing obligations. In common parlance, it would mean that the company has no available means to meet its commercial liabilities.  In the matter of RCL, the question was raised whether the inability to pay the interest alone is sufficient to commence the CIRP or should the financial creditor is required to wait until the investment matures to determine the Corporate Debtor’s bankruptcy.

As per section 3(11) of the Code, a debt is a responsibility or an obligation in respect of a claim due from any person and includes both financial and operational creditors. Further section 5(8) of the Code defines the “financial debt” as a debt along with interest, if any , which inter alia includes money borrowed against payment of interest. The concept of time value of money is of quite significance. It implies that money today is worth more than the money in future. Therefore, borrower charge interest to protect their money from inflation and to compensate them for incurring the risk of lending it out.

The phrase “disbursed against consideration for time value of money” has been the subject of interpretation in number of cases. The words “time value” has been interpreted to mean compensation or the price paid for the efflux of time for which the money has been disbursed. This may be in the form of interest paid on the money or the factoring of a discount in the payment

Some judicial pronouncements

  • In the matter of Pioneer Urban Land and Infrastructure Limited and another vs Union of India and others, Supreme Court held that even the individuals who were the individuals or the fixed deposit holders could be considered Financial Creditors to initiate Corporate Insolvency Resolution Process.
  • In the matter of Orator Marketing Pvt Ltd Vs. M/s. Samtex Desinz Pvt Ltd, the Hon;ble Supreme Court observed that the term financial dent could not be read in isolation without referring to other judicial interpretations.

 

Conclusion

Further, there are other instances also where the NCLTs allowed the initiation of CIRP for non-payment of the interest. For instance, the NCLT, Kolkata admitted the insolvency petition filed by Gulf Oil Lubricants India Limited (GOLIL), against Eastern Coalfields Ltd. (ECL), a subsidiary of Coal India, on its refusal to pay the interest amount at the rate of 18 per cent per annum on the original debt of around Rs. 85 lakh.  Thus, the word ‘financial debt’ includes not only the principal amount but also the interest due thereon.