Section 9 IBC Upholds CIRP Initiation for Undelivered Goods Despite Advance Payment and Disputed Claims
- REEDLAW
- 10 hours ago
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REEDLAW Legal News Network reports: In a pivotal ruling, the National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, upheld the initiation of the Corporate Insolvency Resolution Process (CIRP) under Section 9 of the Insolvency and Bankruptcy Code, 2016, against a corporate debtor, despite the existence of advance payment and disputed claims. The Tribunal clarified that an advance paid for goods or services qualifies as an operational debt when the contracted material or service remains undelivered, and the absence of a pre-existing dispute or acknowledgement in corporate records signifies default, validating the CIRP initiation.
The Bench, comprising Justice Yogesh Khanna (Judicial Member) and Mr. Indevar Pandey (Technical Member), observed that even when payments have been made in advance, the failure to deliver the contracted goods or services creates a legitimate operational debt under Section 9. The Tribunal emphasised that in the absence of a pre-existing dispute recorded in the corporate books or any acknowledgement of the debt by the corporate debtor, the financial creditor’s claim is prima facie valid, thereby justifying the commencement of insolvency proceedings.
The appeal arose from an order admitting an application under Section 9 of the Code and initiating CIRP against the Corporate Debtor. The Appellant, in the capacity of suspended director, challenged such admission by asserting that the claim did not constitute an operational debt and that no default existed. A commercial agreement was executed for the sale of machinery and scrap, under which the Petitioner had advanced the full consideration. The Appellant’s stand was that the contractual obligations stood completed since the scrap was already lifted during the relevant period, thereby concluding the transaction. It was further contended that the documents relied upon to allege continued non-removal of scrap were fabricated, never received by the Corporate Debtor, and were issued after a complete change in management. The Appellant relied upon the absence of any contractual clause requiring refund of the advance and contended that, therefore, no enforceable liability existed.
It was also argued that entries in the balance sheet merely reflected accounting adjustments pending receipt of statutory particulars and could not constitute an acknowledgement of debt. The alleged default date, according to the Appellant, stood beyond limitation and was contradicted by multiple dates mentioned in the statutory notice and pleadings. It was further stated that the Section 9 proceedings merely attempted to recover a commercial advance and were vitiated by mala fides. The Appellant additionally asserted that the order was non-speaking since objections and replies, though taken on record, were not considered.
The Petitioner, on the contrary, asserted that the advance amount was paid in full and that the agreed material was never permitted to be lifted, despite repeated demands. Letters claiming removal permission or refund were stated to be duly acknowledged by the Corporate Debtor. Reliance was placed upon the Corporate Debtor’s audited balance sheets showing the said advance under the head “Advance from others,” which, according to the Petitioner, amounted to a continuing acknowledgement of liability. It was submitted that no reply was issued to the demand notice and that repeated adjournments to file a reply before the Adjudicating Authority, and subsequent filing of a delayed response, demonstrated the absence of any pre-existing dispute.
The Petitioner further relied on judicial authority recognising purchasers who advance consideration for goods or services as operational creditors. The Petitioner maintained that failure to either supply the contracted goods or refund the advance constituted default as defined under the Code. It was also submitted that allegations regarding forgery of correspondence arose belatedly, only after proceedings reached an advanced stage, and therefore could not constitute a dispute predating issuance of the demand notice. It was argued that Section 9 proceedings were summary in nature and did not require full evidentiary evaluation, as long as the existence of an operational debt, default, and absence of pre-existing dispute stood established.
The appeal was thus directed against an order which admitted the petition and commenced CIRP, whereas the Appellant sought its setting-aside on grounds relating to maintainability, existence of dispute, limitation, and procedural infirmities. The competing positions turned on whether the transaction generated an operational debt, whether the material was actually lifted, whether demands for removal or refund were contemporaneous and bona fide, and whether the balance sheet entries constituted acknowledgement so as to sustain limitation and default.
Mr. Abhijeet Sinha, Sr. Advocate, Mr. Malak Bhatt, Ms. Neeha Nagpal, Mr. Saikat Sarkar and Ms. Nitya Prabhakar, Advocates, represented the Appellant.
Mr. Navin Pahwa, Sr. Advocate, Mr. Himanshu Satija, Mr. Harsh Saxena and Ms. Ridhi Ranjan, Advocates, appeared for the Respondents.
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