2025 (10) TMI 974 - AT - IBC

Admission of Section 9 petition upheld: Rs1 crore advance unpaid, balance-sheet acknowledgement revived limitation, appeal dismissed

Rakesh Bhailalbhai Patel (Suspended Director of Vasundhara Seamless Stainless Tubes Private Limited) Versus Vasundhara Seamless Stainless Tubes Private Limited and Hiralal Bhimjibhai Kumavat, Ahmedabad

NCLAT upholds admission of Section 9 petition: advance of Rs.1 crore was paid, goods were neither delivered nor refunded, and the corporate debtor's ... Challenge to admission order - time limitation - nature of the transaction between the Corporate Debtor and the Operational Creditor arising out of the Sale Agreement - legally recoverable operational debt or not - Corporate Debtor’s failure to deliver the contracted goods or refund the amount amounts to a default as contemplated under Section 3(12) of the IBC or not. Time limitation - HELD THAT:- The Operational Creditor has satisfactorily established: (a) the payment of Rs. 1 crore constituted advance consideration for supply of goods, (b) the goods were neither delivered nor the consideration refunded, and (c) the Corporate Debtor’s balance sheets and conduct confirm continuing acknowledgment of liability. Thus existence of “operational debt” and “default” as defined under Section 5(21) and Section 3(12) respectively of the Code have been clearly established. It is further noted that the application is also not hit by limitation as there is clear acknowledgement of outstanding advance, in the last balance sheet of the CD for the year 2021-22, which has been placed on record. The acknowledgement in balance sheet of the CD as on 31.03.2022 has the effect of extending the limitation period upto 31.03.2025. The petition under Section 9 in this matter was filed on 23.06.2023 which was well within limitation. Hon’ble Supreme Court in Asset Reconstruction Company (India) Ltd. v. Bishal Jaiswal, [2021 (4) TMI 753 - SUPREME COURT], decisively held that an acknowledgment of liability in a company’s balance sheet constitutes acknowledgment under Section 18 of the Limitation Act, thereby restarting limitation. This principle was reaffirmed in Dena Bank v. C. Shivakumar Reddy, [2021 (8) TMI 315 - SUPREME COURT], where the Court observed that acknowledgment in a balance sheet or in a one-time settlement proposal renews the period of limitation for the purpose of proceedings under the IBC. Thus, the Adjudicating Authority rightly admitted the Section 9 application. As it was filed within the limitation period and the existence of operational debt and default, is found to be legally correct and based on sound appreciation of facts and law. Pre-existing disputes - whether the alleged liability of Rs. 1 crore, arising from the Sale Agreement dated 31.01.2019, was genuinely disputed by the Corporate Debtor before the issuance of the demand notice on 01.05.2023? - HELD THAT:- As regards the NeSL entry showing the debt as “disputed,” the Respondent explains that this entry was unilaterally marked by the Corporate Debtor without any substantiating document, and therefore cannot override the consistent written record and acknowledgments of liability in the Corporate Debtor’s financial statements. He also pointed out that the Corporate Debtor repeatedly sought time to file its reply before the NCLT, but failed to do so within the stipulated period, which further indicates that there was no genuine dispute in existence prior to the proceedings. In determining whether a dispute is “pre-existing,” the test laid down by the Hon’ble Supreme Court in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. [2017 (9) TMI 1270 - SUPREME COURT] is applied. In this case the Court held that the dispute must be (i) plausible, and (ii) must have arisen before the receipt of the demand notice. Mere assertion of a dispute or the filing of a complaint after the commencement of insolvency proceedings is insufficient to oust the jurisdiction of the Adjudicating Authority under Section 9 of the Code. In the present case, it is noted that the demand notice under Section 8 was issued on 01.05.2023. The only document relied upon by the Appellant to show a dispute is a police complaint dated 20.07.2024—filed more than fourteen months later. There is not a single piece of evidence on record to suggest that the Corporate Debtor raised any objection to the authenticity of the letters, denied the liability, or communicated any disagreement regarding the Rs. 1 crore transaction before that date. Even during the entire period between 2019 and 2023, there is no correspondence from the Corporate Debtor questioning the Operational Creditor’s repeated communications or denying its obligation to refund. The Appellant has failed to establish the existence of any bona fide, pre-existing dispute. The allegations of forgery and fabrication are wholly unsubstantiated, raised belatedly, and evidently designed to frustrate the insolvency process. The police complaint lodged after the conclusion of hearing is not contemporaneous evidence of dispute, but an afterthought. The balance sheets, correspondence, and unrefuted demands of the Operational Creditor all point to the existence of an undisputed debt and default - the Adjudicating Authority correctly applied the Mobilox test and rightly concluded that the defence set up by the Corporate Debtor was moonshine defence and not supported by any pre-existing dispute. There was no credible dispute that could bar the admission of the Section 9 petition. There are no infirmity in the order of the Adjudicating Authority admitting the application under Section 9 of the Code - The appeal is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the sum of Rs. 1 crore paid under a Sale/Slump Sale Agreement constitutes an 'operational debt' within the meaning of Section 5(21) of the Insolvency and Bankruptcy Code (IBC). 2. Whether a 'default' as contemplated by Section 3(12) of the IBC is established by the Corporate Debtor's alleged failure to permit lifting of goods or refund the advance. 3. Whether there existed a bona fide, pre-existing dispute prior to the demand notice (Section 8) that would bar admission under Section 9(5)(ii)(d) of the IBC. 4. Whether entries in audited balance sheets and continuing 'advance' entries constitute an acknowledgment of debt for the purposes of limitation and Section 18 of the Limitation Act. 5. Whether the Adjudicating Authority's admission order was vitiated by being non-speaking or by failure to consider material objections and documents. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether the advance payment under the sale agreement is an 'operational debt' under Section 5(21) IBC Legal framework: Section 5(21) defines 'operational debt' as a claim in respect of the provision of goods or services; procedural threshold for Section 9 requires existence of operational debt. Precedent Treatment: The Tribunal applied and followed the ratio in the Supreme Court decision that recognises advance payments made for goods/services as forming operational debt when performance fails. Interpretation and reasoning: The Tribunal found the payment of Rs. 1 crore was advance consideration for supply of scrap and machinery. The failure to deliver or refund creates a right to payment having a direct nexus with provision of goods. The availability of a formal invoice is not a precondition where contract and demand communications establish the transaction. Ratio vs. Obiter: Ratio - advance payment for goods which remain undelivered constitutes operational debt under Section 5(21). Obiter - none additional on this point. Conclusion: The amount qualifies as operational debt under Section 5(21) of the IBC. Issue 2 - Whether default under Section 3(12) IBC is established Legal framework: Section 3(12) defines 'default'; the Adjudicating Authority must be satisfied that default has occurred in respect of an operational debt. Precedent Treatment: The Tribunal relied on accepted principles that non-performance of contractual obligations entitles the creditor to claim default when no refund or performance is rendered. Interpretation and reasoning: The Tribunal observed absence of contemporaneous documentary proof (delivery receipts, weighment slips, gate passes) from the Corporate Debtor to rebut the operational creditor's case that goods were not delivered. The chain of demand letters and the continuing accounting entries reinforced existence of unpaid obligation. Even in absence of an express refund clause, principles of contract law (Sections 65 and 70, Indian Contract Act) imply refund obligations where performance is not rendered. Ratio vs. Obiter: Ratio - failure to deliver contracted goods or to refund advance where supported by correspondence and accounting entries constitutes default under Section 3(12). Conclusion: Default has been established and the statutory requirement for admission under Section 9 as to default is satisfied. Issue 3 - Existence of a bona fide, pre-existing dispute prior to issuance of the demand notice Legal framework: Section 9(5)(ii)(d) empowers rejection if an operational creditor's claim is covered by a pre-existing dispute; Mobilox test requires the dispute be plausible and pre-existing to the demand notice. Precedent Treatment: The Tribunal applied the Mobilox test for pre-existing disputes and followed later decisions holding that disputes raised after demand notice or as belated fabrications do not oust Section 9 jurisdiction. Interpretation and reasoning: The Tribunal examined timing and substance of the alleged dispute. It found no contemporaneous objection or repudiation prior to the demand notice date; the police complaint alleging forgery was filed well after the demand notice and after the matter was reserved, rendering it an afterthought. The letters relied upon by the operational creditor bore corporate stamps and acknowledgements which were not controverted in any contemporaneous record prior to the demand notice. The NeSL marking of 'disputed' unaccompanied by pre-existing documentary support was held insufficient. Ratio vs. Obiter: Ratio - a dispute raised after the issuance of demand notice or after initiation of proceedings is not a pre-existing dispute under Mobilox; a mere marking as 'disputed' on an information utility without supporting pre-notice material does not displace contractual and audit records. Conclusion: No bona fide, pre-existing dispute existed; the Adjudicating Authority correctly declined to reject the Section 9 petition on this ground. Issue 4 - Whether balance sheet entries constitute acknowledgment of debt for limitation purposes Legal framework: Section 18 Limitation Act and judicial precedent on the effect of entries in audited financial statements as acknowledgment restarting limitation. Precedent Treatment: The Tribunal followed Supreme Court precedents holding that unqualified entries in audited balance sheets acknowledging the creditor and the amount can constitute acknowledgment under Section 18, thereby extending limitation. Interpretation and reasoning: The Tribunal noted continuous 'Advance from Others - B.N. Enterprises' entries in successive audited balance sheets without auditor qualification or explanatory note. The Tribunal treated these audited disclosures as contemporaneous acknowledgments of liability and held they renew the limitation period, applying the settled approach that balance-sheet entries may amount to acknowledgment where they demonstrate an unequivocal intention to treat the amount as payable. Ratio vs. Obiter: Ratio - unqualified audited balance sheet entries naming the creditor and reflecting the advance constitute acknowledgment under Section 18 and extend limitation. Conclusion: The petition was within limitation, the balance sheet entry operating to extend limitation to encompass the Section 9 filing. Issue 5 - Whether the Adjudicating Authority's order was non-speaking and thereby vitiated Legal framework: Administrative law and IBC jurisprudence require reasoned orders addressing material objections where necessary to ensure fairness and application of statutory tests. Precedent Treatment: The Tribunal considered submissions alleging the impugned order was non-speaking and failed to address objections, but evaluated whether the Adjudicating Authority applied the correct legal tests and recorded reasons sufficient to support admission. Interpretation and reasoning: On review of record, pleadings, and hearings, the Tribunal concluded the Adjudicating Authority did consider material facets - existence of operational debt, default, and absence of pre-existing dispute - and applied the proper summary standard under Section 9. The Tribunal found the admission order consistent with record evidence (correspondence and audited accounts) and legal standards; therefore it was not vitiated for being mechanical or non-speaking in a manner that would invalidate the decision. Ratio vs. Obiter: Ratio - where the Adjudicating Authority, on the record, applies the statutory tests and its conclusions are supported by documents and established legal standards, the order will not be set aside as non-speaking. Conclusion: The impugned admission order was not vitiated for being non-speaking or for failure to consider material objections. Final Disposition The Tribunal held that (a) the advance payment constituted an operational debt; (b) default was established; (c) no bona fide pre-existing dispute existed prior to the demand notice; (d) audited balance sheet entries constituted acknowledgment for limitation purposes; and (e) the Adjudicating Authority's admission under Section 9 was legally correct. The appeal was dismissed.