2025 (4) TMI 1400 - AT - IBC

Operational creditor's Section 9 application rejected for suppressing payments and inflating debt below threshold

Aquarius H2O Dynamics Private Limited Versus M/s Riddhi Siddhi Metals

Aquarius H2O Dynamics Private Limited Versus M/s Riddhi Siddhi Metals - TMI 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:Whether the Section 9 application under the Insolvency and Bankruptcy Code, 2016 ('IBC') filed by the Operational Creditor was maintainable, specifically whether the minimum threshold amount of default prescribed under Section 4 of the IBC (Rs. 1 crore effective from 24.03.2020) was met.Whether the Operational Creditor suppressed material facts regarding payments made by the Corporate Debtor prior to issuance of the Section 8 demand notice, thereby misleading the Adjudicating Authority.Whether the Adjudicating Authority committed an error in admitting the Section 9 petition ex-parte without giving the Corporate Debtor a fair opportunity to be heard, thus violating the principles of natural justice.The validity and relevance of the payments claimed to have been made by the Corporate Debtor to the Operational Creditor, including the characterization of payments made by related entities or persons.Whether the interest claimed by the Operational Creditor was payable under the contract and should be included in calculating the default amount for threshold purposes.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Maintainability of Section 9 Application and Threshold Limit under Section 4 of IBCLegal Framework and Precedents: Section 4 of the IBC mandates a minimum default of Rs. 1 crore for an application under Section 9 to be maintainable, effective from 24.03.2020. The Supreme Court in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2018) laid down that the Adjudicating Authority must verify the existence of a default and whether it exceeds the prescribed threshold before admitting a petition under Section 9. This threshold is reiterated in Tribunal precedents emphasizing strict compliance.Court's Interpretation and Reasoning: The Tribunal examined whether the Operational Creditor's claim exceeded Rs. 1 crore after accounting for payments made by the Corporate Debtor. The Appellant contended that payments aggregating approximately Rs. 11 lakhs were made before the Section 8 demand notice, which the Operational Creditor suppressed. If these payments are considered, the outstanding amount falls below Rs. 1 crore, rendering the petition non-maintainable.Key Evidence and Findings: The Operational Creditor's bank statements revealed receipts aggregating Rs. 13 lakhs from various sources: Rs. 9.50 lakhs from Shreeji Equipments, Rs. 2.50 lakhs from Simon Kumar Patel, and Rs. 1 lakh from Rameshbhai Patel. However, the ledger account maintained by the Operational Creditor for the Corporate Debtor failed to reflect these payments. Instead, some payments appeared in the ledger for Shreeji Equipments, a sister concern or proprietary firm related to the Corporate Debtor, and payments by individuals associated with the Corporate Debtor were recorded under Shreeji Equipments' ledger.Application of Law to Facts: The Tribunal noted the mismatch between bank statements and ledger accounts and found the Operational Creditor's ledger account for the Corporate Debtor was not updated or accurate. The payments by related entities and individuals connected to the Corporate Debtor were prima facie payments on behalf of the Corporate Debtor, and their exclusion from the ledger of the Corporate Debtor was misleading.Treatment of Competing Arguments: The Operational Creditor argued that payments from Shreeji Equipments and others were independent transactions unrelated to the Corporate Debtor. The Appellant rebutted that these payments were effectively on behalf of the Corporate Debtor due to the relationship between the parties. The Tribunal found the Operational Creditor failed to provide a credible explanation for the ledger discrepancies and accepted the Appellant's contention that the payments should be accounted for in the Corporate Debtor's outstanding dues.Conclusion: The Tribunal concluded that the outstanding debt, after accounting for these payments, was below the Rs. 1 crore threshold, making the Section 9 application not maintainable.Issue 2: Suppression of Material Facts and Alleged Fraud by Operational CreditorLegal Framework: The IBC and principles of natural justice require full and fair disclosure of material facts. Suppression or misrepresentation can vitiate proceedings.Court's Interpretation and Reasoning: The Tribunal observed that the Operational Creditor suppressed the payments made by the Corporate Debtor and related parties, which materially affected the maintainability of the petition. The ledger accounts provided were inconsistent and incomplete, indicating a deliberate attempt to mislead the Adjudicating Authority.Key Evidence and Findings: The bank statements and ledger accounts showed discrepancies. The Operational Creditor's failure to reflect payments post 12.05.2023 in the ledger of the Corporate Debtor was significant. The Tribunal inferred that the Operational Creditor did not present a true and updated ledger account.Application of Law to Facts: The Tribunal treated the suppression as material and prejudicial, leading to a misrepresentation before the Adjudicating Authority.Treatment of Competing Arguments: The Operational Creditor denied suppression, stating payments were unrelated. The Tribunal found this explanation unconvincing.Conclusion: The Tribunal held that the Operational Creditor suppressed material facts and misled the Adjudicating Authority.Issue 3: Violation of Principles of Natural Justice Due to Ex-parte AdmissionLegal Framework: The principles of natural justice require that a party be given a fair opportunity to be heard before adverse orders are passed. Ex-parte orders are permissible only where the party deliberately avoids appearance despite due notice.Court's Interpretation and Reasoning: The Corporate Debtor claimed it was deprived of a fair opportunity because the Section 8 notice was served at an incorrect address, leading to non-appearance before the Adjudicating Authority. The Adjudicating Authority admitted the petition ex-parte after publication of notice and non-appearance of the Corporate Debtor.Key Evidence and Findings: The Tribunal noted the Corporate Debtor's contention that the notice was served incorrectly, which prevented it from defending itself. The Adjudicating Authority's admission of the petition ex-parte without hearing the Corporate Debtor was therefore questioned.Application of Law to Facts: The Tribunal found that the Corporate Debtor was denied a fair hearing, which is a fundamental requirement under the IBC and the principles of natural justice.Treatment of Competing Arguments: The Operational Creditor argued that the notice was properly served and the Corporate Debtor deliberately avoided appearance. The Tribunal did not find sufficient evidence to reject the Corporate Debtor's claim of improper service.Conclusion: The Tribunal held that the ex-parte admission violated the principles of natural justice.Issue 4: Inclusion of Interest Amount in Default CalculationLegal Framework: Under the IBC, the default amount includes principal and interest only if the interest is payable under the contract or established practice.Court's Interpretation and Reasoning: The Operational Creditor claimed an interest amount of Rs. 15,19,753/- added unilaterally to the principal amount. The Appellant contended that no contract provision or past practice existed for payment of interest.Key Evidence and Findings: No contractual clause or history of interest payments was demonstrated by the Operational Creditor.Application of Law to Facts: The Tribunal agreed with the Appellant that the interest amount was not payable and should be excluded from the default calculation.Treatment of Competing Arguments: The Operational Creditor's unilateral addition of interest was rejected due to lack of contractual basis.Conclusion: Interest claimed was excluded from the default amount.3. SIGNIFICANT HOLDINGSThe Tribunal held:'Prima-facie, we are persuaded to infer that the Ledger Account of the Corporate Debtor as maintained by the Operational Creditor is not an updated Ledger Account and did not depict the true and correct status of payments received by them from the Corporate Debtor. If the payment of Rs 11 lakhs claimed to have been made by the Corporate Debtor after 12.05.2023 is taken into account, the outstanding liability falls below Rs 1 Cr. and thus fails to meet the minimum threshold limit prescribed under Section 4 of the IBC. The Adjudicating Authority was therefore misled into admitting the Corporate Debtor into CIRP.''If the payments made by the Corporate Debtor after 12.05.2023 are factorised, the debt due to the Operational Creditor was clearly below the prescribed minimum threshold limit of Rs 1 Cr. and hence the Section 9 application of the Operational Creditor was not maintainable. Triggering of CIRP in the present facts of the case where, prima-facie, the outstanding liability is below the threshold limit is unwarranted.''The Appeal is admitted. We therefore set aside the impugned order. The order passed by the Adjudicating Authority initiating CIRP against the Corporate Debtor and all other orders pursuant to impugned order are set aside. The Corporate Debtor Company is freed from the rigours of CIRP and is allowed to function independently with immediate effect.'Core principles established include:Strict adherence to the minimum default threshold under Section 4 of the IBC is mandatory for maintainability of Section 9 applications.Operational Creditors must disclose all material facts, including payments received, to prevent misleading the Adjudicating Authority.Interest claimed must be contractually or customarily payable to be included in default calculations.Principles of natural justice require that the Corporate Debtor be given a fair opportunity to be heard before admission of insolvency proceedings.Ex-parte admission without proper service and opportunity to defend is liable to be set aside.