The intersection of sectoral legislations with the Insolvency and Bankruptcy Code, 2016 (IBC) continues to be a hotbed of judicial debate, drawing the delicate line between contractual remedies and insolvency-triggering defaults. A recent pronouncement by the National Company Law Tribunal (NCLT), Mumbai Bench, in Shree Jajoo Instrument Manufacturing Corporation vs. Tapasya Engineering Works Pvt. Ltd. [CP (IB) 1055 (MB) 2024, decided on 15.07.2025], reiterates that interest claims under the MSMED Act cannot be included as part of the “operational debt” for the purposes of meeting the Section 4 threshold under the IBC.
The Core Dispute
The operational creditor, Shree Jajoo Instrument Manufacturing Corporation, invoked Section 9 of the IBC seeking initiation of CIRP against the corporate debtor for an alleged default of ₹1,33,55,290.42/-. Of this, ₹74,68,989/- was claimed as principal, while ₹58,56,301.1/- represented interest at 18% allegedly due under the MSMED Act based on terms mentioned in tax invoices.
The Legal Crux: Is Interest Under MSMED Act Admissible in Operational Debt Calculation?
The Hon’ble Bench, comprising Justice (Retd.) Virendrasingh Gyansingh Bisht and Mr. Prabhat Kumar, examined two pivotal questions:
- Can interest under MSMED Act be included to compute the operational debt threshold under Section 4 of the IBC (₹1 crore)?
- Can the NCLT adjudicate disputes regarding interest payable under the MSMED Act?
Answering both in the negative, the Tribunal followed recent NCLAT precedents—Rishabh Infra v. Sadbhav Engineering Ltd. [(2024) ibclaw.in 707 NCLAT] and SNJ Synthetics Ltd. v. PepsiCo India Holdings Pvt. Ltd. [(2025) ibclaw.in 342 NCLAT]—to reject the Petition.
The Jurisprudence: Synchrony Between Code and Precedent
In Rishabh Infra, the NCLAT held that mere mention of interest terms in tax invoices does not create a binding obligation unless there is a separate agreement showing the corporate debtor’s consent. This aligns with the contractual sanctity principle—where the bargain, not the unilateral declaration, governs.
Further, in SNJ Synthetics, the Appellate Tribunal stressed that the IBC is not a mechanism for mere debt recovery. Turning it into one would violate the Code’s preambular objective—resolution, not liquidation. Importantly, it held that neither the Adjudicating Authority (NCLT) nor the NCLAT is the proper forum to determine contested statutory interest claims under the MSMED Act.
The Mumbai Bench, in the instant case, fortified these rulings by refusing to consider the MSMED interest component while evaluating the minimum default threshold. Since the principal amount alone fell short of ₹1 crore, the Petition was dismissed.
Implications and Reflections
This decision reinforces two cardinal propositions under the IBC:
- Operational debt must be clear, undisputed, and contractually enforceable. Contested or statutorily claimed interest—especially under the MSMED Act—cannot be used to artificially inflate the debt to meet the Section 4 threshold.
- NCLT is not a court of recovery. It cannot adjudicate statutory interest disputes that require evidentiary scrutiny and determination of liability under non-IBC laws.
Conclusion: Navigating the Tightrope Between Debt and Default
This decision serves as a stern reminder to operational creditors that the IBC is a special legislation designed for resolution, not a tool for coercive recovery. Before invoking the Code, creditors must ensure that their claims—especially interest claims—are either admitted, contractually acknowledged, or adjudicated by a competent authority.
MSME claimants, particularly, should take heed. While the MSMED Act provides a potent statutory remedy for delayed payments, the route to enforcement lies not through the IBC unless the principal itself suffices under Section 4, but via separate forums under the MSMED framework.
The NCLT Mumbai has once again reminded us that creditor vigilance, not creditor opportunism, must animate proceedings under the IBC.
Disclaimer
This blog is a general academic commentary on a recent judicial pronouncement and is intended for informational purposes only. The content herein should not be construed as legal advice or opinion. Readers are encouraged to consult qualified professionals for advice specific to their circumstances.