Section 9 application dismissed for full claim where principal below ?1 crore and unilateral invoice cannot prove interest

NCLAT (PB) held that the Section 9 application was not maintainable for the full claimed amount because the principal debt (?79,82,857) fell below the ?1 crore threshold and the interest (?45,12,857) could not be included where it was asserted only by a unilateral invoice entry without any agreement or other evidence. The Tribunal's reliance on that invoice was erroneous. NCLAT also found a pre-existing dispute over alleged fake invoicing justifying withholding of the principal. The appeal was allowed and the impugned order set aside, without any order as to costs.

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ISSUES PRESENTED AND CONSIDERED

1. Whether an application under Section 9 of the Insolvency and Bankruptcy Code is maintainable where the principal claim is below the monetary threshold in Section 4, but the Operational Creditor includes interest claimed solely by a unilateral entry in invoices to reach the threshold.

2. Whether the existence of a pre-existing dispute - arising from communications by the GST investigative authority alleging fake invoicing and directing withholding or reversal of input tax credit - precludes admission of an application under Section 9.

3. Whether reliance by the Adjudicating Authority on communications of the GST authority that were not addressed to the Corporate Debtor and which the Corporate Debtor did not receive, justifies finding absence of a bona fide reason for non-payment.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Inclusion of interest based solely on unilateral invoice entry to satisfy Section 4 threshold

Legal framework: Section 9 (operational creditor application) of the Code; Section 4 threshold (minimum amount of default for admission). Principle that debt must be proved and that interest forms part of debt only where there is agreement/admission or other supporting document. Relevant jurisprudence considered by the Court included decisions holding that unilateral invoice entries alone are insufficient to establish agreement for interest.

Precedent treatment: The Tribunal relied on an earlier decision of this Appellate Tribunal that treated interest in invoices as part of the debt when clearly stipulated. The Court considered subsequent decisions (including Rishabh Infra and Shitanshu Bipin Vora) which qualify Prashant Aggarwal and hold that mere unilateral invoice entries, absent agreement or admission, do not establish a liability to pay interest.

Interpretation and reasoning: The Court examined whether any evidence beyond the invoice existed to establish an agreement to pay 18% p.a. interest. Finding none, the Court held that the Operational Creditor's sole reliance on the invoice entry was inadequate. The Court read the prior authorities as requiring either an agreement between parties, an admission by the Corporate Debtor, or other documentary corroboration before interest can be treated as part of the debt for threshold calculation under Section 4.

Ratio vs. Obiter: Ratio - where interest is claimed solely by unilateral invoice entry without agreement or admission, such interest cannot be treated as part of the debt for purposes of Section 4 threshold in a Section 9 application. The Court expressly overruled the Tribunal's exclusive reliance on the invoice entry in this case. Observational remarks on authorities distinguishing factual permutations are obiter to the extent they discuss nuances of earlier cases.

Conclusions: The Tribunal erred in including the invoice-stated interest of Rs. 45,12,857/- to reach the statutory threshold. The principal alone (Rs. 79,82,857/-) was below Section 4 threshold; therefore, inclusion of unilateral invoice interest was impermissible and the Section 9 application was not maintainable on that basis.

Issue 2 - Existence of pre-existing dispute arising from GST authority communications and effect on maintainability

Legal framework: Concept of pre-existing dispute under the Code as a bar to admission under Section 9; interplay between insolvency proceedings and investigations/communications by tax authorities (GST investigative body) including directions to reverse input tax credit or withhold payments.

Precedent treatment: The Court considered authorities recognizing that bona fide disputes, even if later resolved, preclude Section 9 admission if they existed on the date of the demand notice. The Court also examined precedent on the relevance and authority of third-party communications that affect payment obligations.

Interpretation and reasoning: The Corporate Debtor admitted supply and principal liability but asserted it withheld payment because of a GST authority's direction dated 14.05.2018 and ensuing investigation into the Operational Creditor's invoices, including orders to reverse input tax credit and provisional attachment of bank accounts. The Court analyzed the record and found that the GST communications created a genuine, contemporaneous reason for non-payment and that the Tribunal ignored or misapplied relevant communications. The Court further noted that the letter relied upon by the Operational Creditor as directing payment was not addressed to the Corporate Debtor and was not received by it, undermining the finding that no bona fide reason for withholding existed.

Ratio vs. Obiter: Ratio - where a Corporate Debtor, on the date of the demand notice, has a bona fide dispute or a legitimate constraint on payment arising from communications by a statutory investigative authority (e.g., directions to reverse ITC, investigations into fake invoicing), such circumstances constitute a pre-existing dispute that can bar admission under Section 9. Obiter - broader remarks on the manner in which tax authority communications should be treated in all factual permutations.

Conclusions: The Tribunal's finding that no pre-existing dispute existed was erroneous. The Corporate Debtor had a bona fide reason, grounded in GST investigative communications and directions, for withholding the principal amount. Consequently, the Section 9 application should not have been admitted on the ground that there was no pre-existing dispute.

Issue 3 - Reliance on GST communications not addressed to or received by the Corporate Debtor

Legal framework: Administrative law principle that communications not addressed to or not received by a party cannot be treated as putting that party on notice; evidentiary requirement to show that a direction was communicated to the person expected to act upon it.

Precedent treatment: The Court evaluated the Tribunal's reliance on a GST communication dated 03.05.2019 and a later reply dated 24.12.2020. The Court referenced the need to consider whether the Corporate Debtor actually received the instruction relied upon by the Operational Creditor.

Interpretation and reasoning: The 03.05.2019 letter was addressed to a different zonal unit and not to the Corporate Debtor. The Corporate Debtor asserted it never received that communication. The Tribunal's conclusion that the Corporate Debtor unjustifiably withheld payment ignored this lack of receipt and the sequence of GST communications (including an earlier letter dated 14.05.2018 addressed to the Corporate Debtor). The Court held that reliance on a communication not sent to or received by the Corporate Debtor to negate its bona fide reason for non-payment was legally unsound.

Ratio vs. Obiter: Ratio - an adjudicative finding that a party had no bona fide reason for non-payment cannot rest on administrative communications that were not addressed to or received by that party; such communication cannot be imputed as notice. Obiter - commentary on due process in treating investigatory communications in insolvency adjudications.

Conclusions: The Tribunal's reliance on the 03.05.2019 communication (which was not addressed to or received by the Corporate Debtor) to conclude absence of a bona fide reason was erroneous. The proper view is that the Corporate Debtor's withholding was linked to communications it had actually received and the ongoing GST investigation.

Overall Disposition and Consequential Directions

Having found error both in the inclusion of invoice-only interest to meet the Section 4 threshold and in the Tribunal's treatment of GST communications and pre-existing dispute, the Court concluded that the Tribunal's admission of the Section 9 application was incorrect. The impugned order admitting the application was set aside. The Court directed refund of amounts deposited under interlocutory direction and made no order as to costs.

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