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Advance received by Corporate Debtor for supply of goods during CIRP is to be treated as CIRP cost

Advance received by Corporate Debtor for supply of goods during CIRP is to be treated as CIRP cost

The Hon’ble National Company Law Appellate Tribunal, New Delhi in the matter of Tuf Metallurgical Private Limited v. Impex Metal & Ferro Alloys Limited & Others, REED 2021 NCLAT Del 02506, held that the amount received as an advance payment by the Corporate Debtor for the supply of goods during the Corporate Insolvency Resolution Process (CIRP), on the failure of Corporate Debtor to supply the said goods, is to be treated as CIRP costs. The Appellate Authority observed that section 20(2)(e) gives power to the IRP to take all actions as are necessary to keep the Corporate Debtor as a going concern. In managing the business operations of the Corporate Debtor, if advance payments for the supply of goods are received, it cannot be treated as raising interim finance. It is an advance for payment of goods which the Corporate Debtor, as a going concern, maybe manufacture. The goods are either to be supplied, or the amount should be returned. If the goods are not supplied, the purchaser cannot be made to run for his money. If this approach is not changed, it will become difficult to keep the Corporate Debtor as a going concern. Such amount received as an advance payment for the supply of goods during the CIRP would have to be treated as CIRP costs. This post discusses the brief background of the case, the issue involved, and the ruling pronounced by the National Company Law Appellate Tribunal.


BACKGROUND

The Appellant filed an Application before National Company Law Tribunal, Kolkata (NCLT) for a direction against the Liquidator of the Corporate Debtor to refund an amount of Rs. 4,50, 54,512 paid in advance by the Appellant for purchase of Ferro Silicon Manganese from the Corporate Debtor during CIRP as the Corporate Debtor failed to supply the said goods on account of a breakdown in its manufacturing abilities. Further, a refund of Rs. 43,56,897 payable as damages by Corporate Debtor on account of his default to pay for the raw materials (Manganese Ore) supplied by Appellant during CIRP period was sought. In the alternative, the Appellant urged to treat the said total refund/claim amounting to Rs. 4,94,11,409 of the Appellant as CIRP costs for the purpose of disbursement under section 52 read with section 53 of Insolvency and Bankruptcy Code, 2016 (IBC). 


The Appellant had also submitted the aforesaid claim as part of CIRP costs before the NCLT as per section 38 of the IBC in Form ‘G’. However, the Liquidator failed to communicate his decision of acceptance or the rejection of Appellant’s claim as CIRP costs in terms of section 40(2) of the IBC. The NCLT vide order dated 9 December 2019 disposed of the Application by issuing a direction to the Liquidator to consider the claims of the Appellant as per law. Aggrieved by the aforesaid order, the Appellant approached the National Company Law Appellate Tribunal (NCLAT).


ISSUE

The moot question for adjudication before the NCLAT was whether the advance paid to Corporate Debtor for the supply of goods during CIRP, on failure to supply part goods, during CIRP can be treated as CIRP costs?


ANALYSIS

Section 40(2) of the IBC mandates the Liquidator to communicate his reasons for admission or rejection of claim within 7 days of such admission or rejection of claims. Further, section 42 of the IBC provides that a creditor may file an Appeal before the NCLT against the Liquidator’s decision to accept or reject the claim, within 14 days from receipt of such decision. Hence, the NCLAT noted that the Liquidator cannot simply sit on the claim without deciding the same one way or the other.


It is noteworthy that the NCLAT in the case of M V Projects v. Divya Jyoti Sponges Iron Pvt Ltd., REED 2019 NCLAT Del 04589, has held that if the Appellant has supplied the goods during the period of the CIRP to keep the company as a going concern, it was the duty of the Resolution Professional to include such cost towards ‘Resolution Process Cost’ under section 5(13) of the IBC for payment in favour of Appellant for non-inclusion of the same, it can be held that the Resolution Plan in question is in violation of section 30(2)(a) of the IBC. Based on the aforesaid, the NCLAT rejected the Liquidator’s argument that the purchaser’s advance during CIRP can never be treated as ‘Insolvency resolution process cost’ within the ambit of section 5(13) of the IBC.


The NCLAT also noted that pursuant to the initiation of CIRP, when the Interim Resolution Professional/ Resolution Professional is required to manage the Corporate Debtor’s operations as a going concern in terms of section 20 of the IBC, if advance payments for supply of goods is received, it cannot be treated as raising interim finance. It is an advance for payment of goods which the Corporate Debtor as a going concern may be manufacturing and the goods are either to be supplied, or the amount should be returned. If the goods are not supplied, according to NCLAT, the purchaser cannot be made to run for his money as it will then become difficult to keep the Corporate Debtors as a going concern. Thus, the NCLAT held that such an amount received as an advance payment for the supply of goods during the CIRP would have to be treated as CIRP costs.


Accordingly, in view of the foregoing, the NCLAT directed the Resolution Professional to respond to the claims made by the Appellant and supply all the necessary details and information relating to transactions impugned in these Appeals before the Liquidator. Further, the Liquidator was ordered to admit or reject the claims of the Appellants recording reasons in terms of section 40 of the IBC within 30 days from the date of this judgment and the Appellant was given the liberty to approach the NCLT against the Liquidator’s decision.

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