2025 (11) TMI 606 - AT - IBC

Section 9 IBC application rejection overturned: curable defects not covered by Section 9(5)(ii), amendment allowed, matter remitted for fresh adjudication

M/s. Metals And Metal Electric Private Limited Versus M/s. Prince foundations limited, Chennai

NCLAT held the adjudicating authority erred in rejecting a Section 9 IBC application for alleged defects (invoice dates, absence of default date, missing ... Initiation of proceeding u/s 9 of I&B Code against the Respondent - Invoices barred by limitation - date of default as mentioned in the Application is later than the date of demand notice - demand notice did not mention any date of default which is not in consonance with provisions of Section 8 and that 9(3)(b) affidavit has not been attached with the Application - HELD THAT:- None of the conditions prevailed, which could be cited for the purposes of rejection of the application, at the hands of the adjudicating authority, as the application thus preferred didn't suffer from any of the discrepancies as specifically identified by the legislature under Section 9(5)(ii). Hence, when the statute has assigned the conditions under which the application under Section 9 of I&B Code could be rejected, and if it doesn't fall to be within those conditions as provided under Section 9(5)(ii) of I&B Code, any other reasoning cannot be assigned by the Learned Tribunal to reject an application under Section 9 of I&B Code. Further, discrepancy in the date of default is a rectifiable defect and the statute permits Learned Adjudicating Authority to allow the Applicant to make new corrections/amendments, if necessary. Thus the very reasoning, which has been assigned in the impugned order while rejecting the Application that, there was no mention made of the date of default, in the face of the provision of invoice-based demand notice in Form-4 and in the face of non-consideration of the terms and conditions of the invoices, do not appear to be logical. Hence the impugned order is hereby quashed. The matter is remitted back to the Learned NCLT, Chennai, for a fresh decision on the application under Section 9 of I&B Code, preferred by the appellant exclusively on its merits. ISSUES PRESENTED AND CONSIDERED 1. Whether a demand notice served in the format of Form-4 (invoice-attached notice) under Rule 5(1)(b) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 must specifically state the date of default for initiation of proceedings under Section 9 of the Insolvency and Bankruptcy Code. 2. Whether a date of default recorded in Form-5 (application under Section 9) that is chronologically later than the date of issuance of the demand notice vitiates the Section 9 application when the demand notice is invoice-based (Form-4). 3. Whether invoices containing a clause permitting payment beyond a stated short period (e.g., 'Payment Cash on demand' with interest payable if unpaid after seven days) create continuing or running transactions such that limitation for initiating proceedings under Section 9 must be computed from the last transaction rather than individual invoice dates. 4. Whether the Adjudicating Authority may reject an application under Section 9 on grounds other than those expressly enumerated in Section 9(5)(ii) of the Code, including non-mention of date of default or perceived time-bar for invoices, without first permitting rectification where permissible. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Form-4 demand notice and requirement to state date of default Legal framework: Section 8(1) of the Code read with Rule 5(1)(a) and (b) prescribes delivery of either a demand notice in Form-3 or a copy of the invoice attached with a notice in Form-4. Form-4 is the prescribed 'notice with which invoice demanding payment is to be attached.' Precedent Treatment: The Principal Bench has held that the applicability of Form-3 or Form-4 depends on the nature of the operational debt and that Form-4 is appropriate where invoices were generated; Form-3 is for other unpaid operational debts. The Bench rejected a view that the word 'or' gives an operational creditor unfettered discretion to choose either form irrespective of transaction nature. Interpretation and reasoning: Form-4 does not prescribe an express field to state the date of default because the default is ascertainable from the invoice attached. Where the demand notice is invoice-based and contains particulars of invoices (column 7), absence of a separately stated 'date of default' in that notice is not fatal. The statutory scheme contemplates two discrete routes and the format of Form-4 inherently accommodates invoice particulars rather than a distinct default-date entry. Ratio vs. Obiter: Ratio - For invoice-based demands under Rule 5(1)(b), non-mention of a separate date of default in the demand notice does not invalidate initiation under Section 9. Obiter - Observations on the comparative roles of Form-3 vis-à-vis Form-4 align with Principal Bench reasoning. Conclusion: A demand notice served in Form-4 need not specifically mention a date of default in the notice itself; the invoice particulars suffice for the purposes of initiating proceedings under Section 9. Issue 2 - Chronological disparity between notice date and date of default recorded in Form-5 Legal framework: Rule 6(1) requires the application under Section 9 to be in Form-5 with particulars including date of default in Part IV. Section 8 and Rule 5 govern the demand notice preceding the application. Precedent Treatment: Principal Bench authority recognizes that Form-4 and Form-3 are not interchangeable by convenience; the nature of debt governs which form applies. There is no authority construing that the date of default in Form-5 must never post-date the demand notice when the demand notice is invoice-based. Interpretation and reasoning: When the demand notice is invoice-based (Form-4), the operational creditor's obligation is to attach invoices and provide particulars; the date of default in Form-5 being later than the date of the demand notice (which merely attaches invoice(s)) does not ipso facto vitiate the application. The 'birth' of the application is the Form-5 filing supported by the invoice-based notice; any discrepancy in the recorded date of default in Form-5 is a rectifiable defect and should not be treated as a substantive ground for rejection where Form-4 is correctly used and invoices are attached. Ratio vs. Obiter: Ratio - A later date of default recorded in Form-5 does not invalidate an otherwise proper invoice-based demand notice under Form-4; inconsistency is a rectifiable defect. Obiter - Observations on the permissibility of correction and the non-fatal nature of such discrepancies. Conclusion: Chronological disparity between demand notice date and date of default shown in the Form-5 application does not automatically vitiate the Section 9 application when the demand notice is Form-4 based; the defect is rectifiable and not a statutory ground for rejection. Issue 3 - Computation of limitation where invoices permit payment beyond a short period and provide for interest (running transactions) Legal framework: Limitation is governed by the Limitation Act (Section 137 referenced) and the Code threshold for triggering CIRP depends on existence of default. Invoice terms and parties' agreement inform when default accrues. Precedent Treatment: The Tribunal recognized contractual terms can affect when default is said to occur and whether invoices are time-barred; prior judicial approach permits computation of limitation from last transaction where transactions are continuous. Interpretation and reasoning: Invoices containing clause permitting payment beyond seven days with an express provision for interest make the contractual obligation variable as to the date of default. If the invoice terms allow payment beyond a nominal short period and expressly provide for interest post that period, default may arise upon demand or on non-payment after the extended permissive period, not necessarily seven days from invoice date. Consequently, such terms can render the series of transactions continuous/running and the limitation period may be computed from the last invoice or last transaction (e.g., 10.08.2020) rather than each invoice date between earlier years, thereby avoiding time-bar for the application filed in 2022. Ratio vs. Obiter: Ratio - Contractual terms that permit payment beyond a stated short period and provide for interest can make the obligation continuous and justify limitation computation from the last transaction. Obiter - Application of specific limitation provisions will depend on facts and dates of delivery/default. Conclusion: Where invoice terms create a running account or permit post-invoice payment with interest, limitation should be computed from the last transaction; invoices should not be mechanically treated as time-barred merely by reference to invoice dates when contractual terms indicate otherwise. Issue 4 - Permissible grounds for rejection of a Section 9 application and the duty to allow rectification Legal framework: Section 9(5)(ii) enumerates specific circumstances in which the Adjudicating Authority shall reject an application, including incompleteness, payment of debt, non-delivery of invoice/notice, notice of dispute, record of dispute in information utility, and pending disciplinary proceedings against proposed RP. A proviso allows the Adjudicating Authority to permit rectification of defects within seven days where the application is incomplete. Precedent Treatment: Statutory text restricts rejection to specified grounds; tribunals have duties to adhere to those grounds and to permit rectification for curable defects. Interpretation and reasoning: The Learned Tribunal's rejection based on non-mention of date of default and on a conclusion of majority of invoices being time-barred did not fall within the statutory grounds for rejection under Section 9(5)(ii). Discrepancy in date of default is rectifiable; absent the enumerated grounds (e.g., non-delivery of invoice or bona fide dispute), the Adjudicating Authority cannot discard the application on other reasoning. The correct course is to allow correction or adjudicate on merits after considering invoice terms and the nature of demand notice. Ratio vs. Obiter: Ratio - Rejection under Section 9 must be confined to grounds in Section 9(5)(ii); curable defects should be permitted to be rectified under the proviso. Obiter - Emphasis on judicial restraint in fashioning non-statutory grounds for rejection. Conclusion: The Adjudicating Authority erred in rejecting the Section 9 application on grounds outside Section 9(5)(ii) and without permitting rectification; therefore the impugned rejection is unsustainable and the matter requires fresh consideration on merits. Overall Disposition The Tribunal quashed the impugned order of rejection and remitted the matter to the Adjudicating Authority for fresh decision on merits, holding that invoice-based demand notices under Form-4 need not state a separate date of default, that the date-of-default discrepancy in Form-5 is rectifiable, that invoice terms permitting post-invoice payment with interest may create running transactions affecting limitation, and that rejection must be confined to grounds in Section 9(5)(ii) with opportunity for correction where applicable.