Contractual default interest cannot replace judicially fixed interest through IBC modification proceedings.

M/s Kurlon Limited, now known as Kanara Consumer Products Limited, advanced a financial facility of ₹52,50,000 to India Green Reality Limited under a Loan Agreement dated 25 April 2017.

The agreement stipulated interest at 1.75% per month during the loan period and, upon default, interest of 2% per month plus additional interest of 1% per month, aggregating to 3% per month.

Following default, the Financial Creditor initiated proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016, claiming ₹71,61,091. The Adjudicating Authority admitted the Corporate Debtor into CIRP on 22 December 2023.

During the proceedings, the Corporate Debtor paid ₹65,00,000, covering the entire principal and a substantial portion of the interest.

By judgment dated 31 January 2025, the NCLAT set aside the admission order and directed payment of the balance amount, after adjustment of ₹65,00,000, with interest at 9% per annum from the date of accrual until actual payment.

The Supreme Court dismissed the Financial Creditor’s challenge but granted liberty to seek modification of the interest rate before the NCLAT.

The Financial Creditor thereafter filed the present application under Rule 11 of the NCLAT Rules, 2016, seeking substitution of the 9% rate with the contractual default rate of 3% per month.

Whether the NCLAT should modify its final judgment dated 31 January 2025 by substituting the awarded interest rate of 9% per annum with the contractual default interest rate of 3% per month.

Whether the application under Rule 11 of the NCLAT Rules, 2016 was maintainable for seeking such modification, or whether it amounted to an impermissible review or reopening of the final judgment.

Whether enforcement of the contractual default interest through the insolvency proceedings would impermissibly convert those proceedings into a recovery action.

The Tribunal applied Rule 11 of the National Company Law Appellate Tribunal Rules, 2016, recognising that inherent powers may be exercised to secure the ends of justice but do not confer an unrestricted power of review.

It applied the contractual principle that parties are ordinarily bound by freely negotiated commercial terms, while holding that courts and tribunals may mould relief in accordance with law, the surrounding circumstances and the nature of the proceedings, relying on Rajasthan State Industrial Development and Investment Corporation v. Diamond and Gem Development Corporation, (2013) 5 SCC 470.

Under Central Bank of India v. Ravindra, (2002) 1 SCC 367, pendente lite and post-decree interest is discretionary and need not mechanically follow the contractual rate; disproportionate interest may be reduced, and penal interest cannot be capitalised or itself bear further interest.

The Tribunal further applied the principle that the IBC is intended for insolvency resolution and not as a substitute for ordinary debt-recovery proceedings, relying on Transmission Corporation of Andhra Pradesh Ltd. v. Equipment Conductors and Cables Ltd., (2019) 12 SCC 697, and related NCLAT decisions.

The contractual provision for 3% monthly default interest was undisputed, but the Tribunal held that its existence did not automatically require modification of the final judgment.

The 9% per annum rate had been consciously fixed after considering the subsequent payment of ₹65,00,000, repayment of the entire principal, and payment of a substantial portion of the interest; those circumstances had also justified setting aside the CIRP admission.

Granting 36% annual interest at that stage would increase the liability to more than ₹1.31 crore, substantially on account of penal interest, and would alter the factual and equitable basis of the earlier final judgment.

The Tribunal found that the Applicant had identified no factual error, inadvertent omission or new circumstance warranting modification; it was effectively seeking a different conclusion on the same material, which could not be achieved under the guise of Rule 11.

Since the CIRP had already been set aside and the surviving dispute concerned the quantum of contractual interest, enforcement of the enhanced rate within the insolvency proceedings would convert them into recovery proceedings.

The Applicant was therefore left to pursue any independent contractual claim before the competent forum, including under the arbitration clause in the Loan Agreement.

The Tribunal declined to modify the 9% per annum interest awarded in its judgment dated 31 January 2025, finding that the rate fairly balanced compensation to the Financial Creditor with the prior repayment of the principal and substantial interest, and avoided misuse of the IBC as a recovery forum.

I.A. No. 2832 of 2025 was dismissed, with no order as to costs.