Appeal dismissed; IRP's rejection of unsubstantiated operational creditor claim upheld due to lack of prima facie evidence

NCLAT dismissed the appeal, upholding the IRP and adjudicating authority's rejection of the operational creditor's claim. The tribunal found the IRP had dutifully sought verification and exercised caution; the claim lacked prima facie support in the corporate debtor's books and other records, and the engagement evidence and alleged allotment of flats/inventories by group companies were not sufficiently substantiated. Doubts about the engagement documentation and failure to provide necessary particulars justified rejection. The IRP's role in collection and preliminary verification was distinguished from the NCLT's adjudicatory function.

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1. ISSUES PRESENTED AND CONSIDERED

1. Whether the Interim Resolution Professional/Resolution Professional (IRP/RP) and the Adjudicating Authority erred in rejecting an operational creditor's claim where the claimed debt was not reflected in the corporate debtor's books of account.

2. Whether documents relied upon by the operational creditor (engagement letter, invoices, emails) suffice under Regulation 7(2) of the CIRP Regulations, 2016 to prove existence of operational debt when financial accounts do not disclose corresponding entries.

3. The scope and limits of the IRP/RP's duty and power in collating, verifying and admitting claims under Section 18 of the IBC and relevant CIRP Regulations, including whether the IRP/RP may adjudicate disputes on merits.

4. Whether alleged defects in the engagement letter (use of LLP seal predating LLP formation) or the admitted provision of services to group companies justify rejection of the claim.

5. Effect of alleged adjustment/set-off of certain invoices by allotment of flats/inventories by group companies on the claim, and the evidentiary burden to prove such adjustments.

6. Whether absence of prior demand or steps to recover dues bears on the veracity and admissibility of the operational creditor's claim.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Sufficiency of absence from books of account to reject claim

Legal framework: Section 18 (duties of IRP) and Regulation 7(2)(b)(iv) (financial accounts as one mode of proof) and Regulations 10-12 (submission and substantiation of claims) of CIRP Regulations 2016 govern collection, collation and verification of operational claims.

Precedent treatment: The Court referred to authoritative guidance that IRP/RP must collect and verify claims but does not possess judicial adjudicatory power; the Swiss Ribbons principle (as relied upon by parties) affirming limited role of IRP/RP in claim collation was invoked and treated as applicable.

Interpretation and reasoning: Financial accounts are prima facial, not exclusive, proof of an operational debt. Regulation 7 explicitly permits other documents (contracts, invoices, court orders, records with information utilities) to prove existence of debt. However, where books do not reflect corresponding entries, other documentary evidence must be scrutinized with "extreme care and caution" because entries in books provide prima facie verifiability. Here, IRP identified only Rs. 45,000 in corporate accounts; remaining claim lacked corresponding entries and supporting corroboration sufficient to establish debt attributable solely to the corporate debtor.

Ratio vs. Obiter: Ratio - absence of entries in corporate books does not automatically defeat a claim but shifts the evidentiary burden upon the claimant to supply other cogent proof under Regulation 7(2). Obiter - cautionary statement on the need for careful scrutiny where books are silent.

Conclusion: The Tribunal reasonably rejected the claim beyond the collated Rs. 45,000 because the claimant failed to produce other reliable documentary proof establishing the claimed sums as debts of the corporate debtor alone.

Issue 2 - Adequacy of engagement letter, invoices and emails under Regulation 7(2)

Legal framework: Regulation 7(2)(b)(i)-(ii) permits contract and invoice to constitute proof; Regulation 7(1) allows submission of supplementary documents and clarifications.

Precedent treatment: The Court applied Regulation 7 as guidance for evidentiary sufficiency without overruling prior authorities; it emphasized that such documents may be accepted if they specifically and reliably attribute the debt to the corporate debtor.

Interpretation and reasoning: The engagement letter on its face engaged the claimant for services to the corporate debtor and group companies and expressly permitted billing in various names. Crucially, the engagement letter did not restrict services to the corporate debtor alone and lacked time limitation; Annexure indicated services to the "organization" and group. Invoices and emails were proffered, but they did not establish that the claimed monthly retainer was owed exclusively by the corporate debtor, nor did they show accepted bills or credit entries in the corporate debtor's records. The engagement letter's content thus created ambiguity regarding apportionment of fees between group entities. Where documentation is equivocal, the IRP's requirement to verify with care justified limited admission.

Ratio vs. Obiter: Ratio - contractual documents and invoices must specifically and reliably demonstrate debt owed by the corporate debtor to satisfy Regulation 7 when financial accounts do not corroborate entries. Obiter - observations on the significance of absence of time-limitation and arbitration clause in the engagement letter.

Conclusion: Engagement letter, invoices and emails were insufficiently specific to establish the claimed sums as a debt of the corporate debtor alone; the IRP/RP's reliance on absence of corroboration in books and on group-allocation language in the contract was reasonable.

Issue 3 - Scope and limits of IRP/RP powers in collation and verification

Legal framework: Section 18 (duties of IRP), Regulation 10 (substantiation), Regulation 11 (cost of proof), Regulation 12 (submission of proof) of CIRP Regulations 2016.

Precedent treatment: Court adhered to the established distinction that IRP/RP collates and verifies claims but does not adjudicate disputes on merits - citing the parties' reliance on controlling Supreme Court authority and treating it as settled law to be followed.

Interpretation and reasoning: The IRP is obligated to collect information and ask for evidence/clarifications as deemed fit, and to admit claims where verification supports admission. The IRP in this matter requested documents, met the claimant, engaged with a corporate employee to clarify, and admitted only the portion corroborated by accounts. The record demonstrates that the IRP performed duties prescribed under Section 18 and Regulations 10-12 rather than adjudicating contested factual disputes, thereby acting within statutory limits.

Ratio vs. Obiter: Ratio - IRP/RP must take diligent steps to verify claims and may admit only what is substantiated; they are not vested with adjudicatory power to decide disputed factual claims beyond verification procedures.

Conclusion: The IRP/RP acted within the scope of their duties in collating and verifying the claim; no impermissible adjudication is shown.

Issue 4 - Effect of alleged defect in engagement letter (LLP seal predating LLP formation)

Legal framework: Principle that document authenticity and consistency are relevant to admissibility and weight of documentary proof under Regulation 7.

Interpretation and reasoning: The IRP's concern about the LLP seal predating formal LLP formation cast doubt on the document's authenticity. The claimant explained the seal appeared on a self-attested copy only and that the original lacked such seal; the Court found this ground unpersuasive to overturn the verification result because even without seal irregularity the larger evidentiary deficiencies persisted.

Ratio vs. Obiter: Obiter - comment that procedural irregularity in a copy may not be determinative where other evidentiary gaps exist.

Conclusion: The seal issue did not materially alter the outcome; claim rejection stood on broader evidentiary inadequacy.

Issue 5 - Alleged set-off by allotment of flats/inventories and evidentiary burden

Legal framework: Claimant bears burden to prove debts and any set-off/adjustment; Regulation 7(1) allows supplementary documents to be filed.

Interpretation and reasoning: Claimant admitted receipt of flats/inventories purportedly in adjustment of litigation fees owed by group entities but failed to provide documentary particulars demonstrating which entity allotted what, in satisfaction of which invoice. Absence of such particulars left the IRP unable to verify whether adjustments discharged the claimed sums or pertained to services other than those advanced against the claim. The Court observed that such unexplained admissions create a cloud of suspicion.

Ratio vs. Obiter: Ratio - where set-off or in-kind adjustments are alleged, claimant must produce clear documentary evidence linking allotment to specific invoices or services; absence permits IRP to treat claim as unverifiable.

Conclusion: Lack of documentary particulars regarding allotments justified non-admission of the unverified portion of the claim.

Issue 6 - Relevance of failure to demand payment prior to CIRP

Legal framework: General evidentiary principle that acts or omissions may bear on credibility; Regulation 11 places cost of proof on creditor.

Interpretation and reasoning: The Court found substance in the Respondent's submission that claimant did not take recovery steps (no demand, notice or follow-up) despite multiple months of unpaid retainer. This omission, combined with absence of corroborative entries and unexplained adjustments, rendered the claim doubtful and supported the IRP's cautious approach.

Ratio vs. Obiter: Obiter - conduct of creditor (failure to demand) is relevant to assessment of claim credibility though not conclusive.

Conclusion: The absence of pre-CIRP recovery efforts contributed to the finding that the claim, beyond the collated amount, was not adequately substantiated.

Final Disposition

On the collective analysis the Court concluded that the IRP/RP and Adjudicating Authority exercised due care in verification; the claimant failed to produce sufficient, specific and corroborative evidence to establish the claimed debt as due from the corporate debtor alone. The appeal is dismissed with no order as to costs and pending interlocutory applications closed.

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