Section 9 CIRP bid fails as facilitator role negates operational debt; application dismissed amid credible dispute findings

NCLAT allowed the appeal and set aside the HC's order admitting the Section 9 application and initiating CIRP against the corporate debtor. It held that the corporate debtor was only a facilitator under a purchase finance arrangement, with goods purchased from a third-party supplier using finance from the debtor's subsidiary and sold directly to the operational creditor's customers. The Tribunal found no operational debt or default, noting the operational creditor's prolonged silence after the relevant invoices and its own admissions regarding payments made. The defence was not "moonshine," rendering the Section 9 application untenable. The application was dismissed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether, on the admitted and contemporaneous documentary record, the relationship between the parties gave rise to an "operational debt" owed by the corporate debtor under the invoices relied upon in the Section 9 application.

1.2 Whether there existed a "pre-existing dispute" within the meaning of the Insolvency and Bankruptcy Code, 2016, as explained in the decision in Mobilox Innovations, sufficient to mandate rejection of the Section 9 application.

1.3 Whether change of the corporate debtor's registered office, after admission of the petition and during pendency of the appeal, affected the jurisdiction of the Appellate Tribunal to decide the appeal on merits.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Existence and nature of "operational debt"

Interpretation and reasoning

2.1 The Tribunal first analysed the "true nature of the transaction" between the parties. The operational creditor had a Purchase Finance Facility from OXYZO, a subsidiary of the corporate debtor, under a sanction letter and Master Facility Agreement. OXYZO disbursed funds directly to SAIL for steel purchased by the operational creditor, while no hypothecation security was provided under the Master Facility Agreement, though Clause 10(i) permitted set-off and lien across OXYZO and its subsidiaries/associates.

2.2 The corporate debtor pleaded, with detailed particulars in its reply to the Section 9 application, that: (i) goods were picked up from SAIL by the corporate debtor on instructions of the operational creditor; (ii) the goods were stored in a warehouse leased by the corporate debtor, in "safe custody" as security for OXYZO under the Purchase Finance Facility; (iii) the operational creditor raised invoices on the corporate debtor merely to transfer title/logistically facilitate movement of goods from the corporate debtor's custody to the operational creditor's customers; and (iv) the corporate debtor in turn raised "counter-invoices" on such customers and transferred sale proceeds to OXYZO towards the operational creditor's liability under the finance facility.

2.3 The Tribunal considered contemporaneous email correspondence of April 2018 (set out in extenso in the judgment) between key representatives of the corporate debtor, OXYZO and the operational creditor. These communications recorded that: (a) the corporate debtor had picked up material from SAIL on behalf of the operational creditor; (b) part of the material had been released to the operational creditor, while substantial quantities were lying "in safe custody of OFB"; (c) further lifting of material from SAIL was to be done by the corporate debtor, with custody to be retained by it; and (d) payments from the operational creditor's customers (BBJ, Gammon etc.) would be used to pay OXYZO, with material being released against such payments. The Tribunal held that these emails corroborated the pleaded position that the corporate debtor was acting as a facilitator/custodian within a structured financing and logistics arrangement, not as a buyer of the goods.

2.4 In paragraph 11 of its reply, the corporate debtor had tabulated the full "chain of events / invoicing": SAIL invoicing the operational creditor; goods held in custody by the corporate debtor as security for OXYZO; the operational creditor issuing invoices to the corporate debtor merely to pass title for logistics and e-way bill purposes; and the corporate debtor issuing corresponding counter-invoices to the operational creditor or its customers with shipping details of those customers. The Tribunal noted that the corporate debtor placed on record (i) the invoices raised by SAIL on the operational creditor, (ii) the invoices relied on by the operational creditor as allegedly due from the corporate debtor, and (iii) matching counter-invoices raised by the corporate debtor to third-party purchasers (GC Steels, Rajesh Sales Corporation) and the operational creditor itself, covering the same material.

2.5 A comparative table, on record before the Adjudicating Authority, showed that: (a) the total value of invoices raised by the operational creditor on the corporate debtor (including the invoices dated 29.08.2018 and 30.08.2018 forming the basis of the Section 8 demand notice) was Rs. 6,90,20,447/-, while (b) the actual sale proceeds realised by the corporate debtor on onward sale of the same material to customers totalled Rs. 6,31,23,755/-, evidencing a loss of Rs. 58,96,692/- for the corporate debtor on those transactions. Ledger extracts also showed the corporate debtor remitting sale proceeds (about Rs. 4.8 crores / Rs. 5.30 crores in different tranches) to OXYZO to set off the operational creditor's liability.

2.6 On this material, the Tribunal held that the Adjudicating Authority's finding that "there is no supporting document to corroborate" the corporate debtor's case that it was merely a facilitator in the Purchase Finance Facility was "unsustainable". The Tribunal found ample contemporaneous documentary support for the corporate debtor's version that: (i) the goods were purchased by the operational creditor from SAIL; (ii) OXYZO funded those purchases; (iii) the corporate debtor held the goods as security/custodian and facilitated their onward sale to customers of the operational creditor; and (iv) the corporate debtor remitted sale proceeds to OXYZO, not to the operational creditor, in discharge of the latter's financing liability.

2.7 The Tribunal rejected the operational creditor's attempt to segment the August 2018 invoices (29.08.2018 and 30.08.2018) as constituting a separate, independent sale transaction where the corporate debtor was the buyer liable to pay invoice value. It held that those invoices formed part of the same integrated financing-cum-logistics arrangement and were raised only to enable the corporate debtor to issue counter-invoices for sale to the operational creditor's customers and to route payment to OXYZO.

Conclusions

2.8 On the totality of pleadings and documentary record, the Tribunal concluded that: (i) the corporate debtor was not a purchaser of goods from the operational creditor; (ii) the invoices raised on the corporate debtor were not "consideration for goods" payable by the corporate debtor to the operational creditor but were issued purely to enable onward sale/logistics and settlement of the operational creditor's liability to OXYZO; and (iii) there was therefore no "operational debt" due and payable by the corporate debtor to the operational creditor in respect of the invoices forming the basis of the Section 9 claim. On this ground alone, the Section 9 application "did not deserve to be admitted."

Issue 2 - Existence of "pre-existing dispute" under Sections 8 and 9 IBC

Legal framework (as discussed)

2.9 The Tribunal set out Section 8(2) IBC and relied on the Supreme Court's decision in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, which holds that where a "notice of dispute" is received, the Adjudicating Authority must reject a complete Section 9 application if: (i) there is a plausible contention requiring further investigation; and (ii) the dispute is not spurious, illusory, hypothetical or a patently feeble legal argument. The Adjudicating Authority is not required to assess the likely success of the defence but only to weed out sham or moonshine disputes.

Interpretation and reasoning

2.10 The operational creditor's Section 8 demand notice dated 13.02.2020 claimed principal of Rs. 1,63,54,418/- with interest, relying on invoices dated 29.08.2018 and 30.08.2018. The corporate debtor, within time, issued a detailed "notice of dispute" dated 27.02.2020, expressly asserting that: (i) no operational debt was due; (ii) the relationship between the parties did not fall within the IBC concept of operational creditor-corporate debtor; and (iii) there existed a "dispute within meaning of Section 5(6) of the Code."

2.11 In that reply, the corporate debtor narrated the underlying arrangement, including that it had picked up material worth Rs. 13.98 crores for the operational creditor from SAIL; that goods were kept in its custody; and that, acting on the operational creditor's instructions, it had been compelled to sell the goods at a loss due to the operational creditor's default and failure to purchase or take delivery. It also itemised multiple categories of charges and losses (warehouse costs, security, logistics, interest etc.) allegedly recoverable from the operational creditor and referred to prior emails documenting these issues.

2.12 The Tribunal emphasised that from September 2018 until the demand notice in February 2020, there had been no communication from the operational creditor asserting that any amount was due from the corporate debtor in relation to the impugned invoices, which supported the corporate debtor's case that no liability was understood or treated as due from it during that period.

2.13 In the proceedings under Section 9, the corporate debtor further elaborated its defence, annexing: (i) the detailed correspondence of April 2018 evidencing the agreed structure of custody, security and sale; (ii) ledgers showing transfer of sale proceeds to OXYZO; and (iii) comparative invoice tables and counter-invoices evidencing sale of the same goods to the operational creditor's customers and the resultant loss. The Tribunal noted that these materials were all before the Adjudicating Authority but were brushed aside with the observation that there were "no supporting documents" and that the defence was "moonshine".

2.14 Applying Mobilox, the Tribunal held that the corporate debtor's defence was grounded in contemporaneous documents, not in bare assertion. The nature and structure of the transactions, the role of OXYZO, the custody arrangement, and the sale and payment trail to OXYZO together raised at least a "plausible contention which requires further investigation". The dispute could not be characterised as spurious, illusory or mere bluster.

Conclusions

2.15 The Tribunal concluded that:

(a) The reply to the demand notice dated 27.02.2020 constituted a proper "notice of dispute" within Section 8(2), specifically invoking the existence of a dispute under Section 5(6) IBC.

(b) The corporate debtor's defence, supported by emails, ledgers and invoices, clearly demonstrated a genuine and substantial dispute on (i) whether any operational debt existed at all and (ii) whether any amount was due from the corporate debtor under the impugned invoices.

(c) In terms of Mobilox, such a defence could not be treated as a "moonshine defence". The Adjudicating Authority erred in holding that there were "no supporting documents" and in admitting the Section 9 petition notwithstanding the existence of this documented dispute.

(d) The presence of this pre-existing dispute was an independent and sufficient ground requiring rejection of the Section 9 application under Section 9(5)(i)(d) IBC.

Issue 3 - Effect of change of registered office on appellate jurisdiction

Interpretation and reasoning

2.16 During pendency of the appeal, the operational creditor filed an interlocutory application contending that, subsequent to initiation of CIRP by the impugned order, the corporate debtor's registered office had been shifted from Delhi to Gujarat. It was argued that: (i) the registered office is the "jurisdictional fact" determining territorial competence; (ii) upon such shift, the territorial jurisdiction of the NCLT, New Delhi (which passed the impugned order), and consequently of any appeal arising therefrom, ceased; and (iii) since an appeal is a continuation of original proceedings, the change in registered office during appeal rendered the appeal non-maintainable before the present Appellate Bench.

2.17 The Tribunal rejected this argument. It held that the appeal before it was directed against the specific order dated 10.11.2023 admitting the Section 9 application. Jurisdiction to entertain and decide that appeal was to be tested with reference to the jurisdiction of the Adjudicating Authority at the time it passed the impugned order and the statutory appellate structure, not by reference to any subsequent change in the corporate debtor's registered office.

2.18 The Tribunal observed that a post-order shift in registered office, as reflected in MCA records, could not retrospectively divest the NCLAT of jurisdiction over an appeal already competently filed against that order. To accept the respondent's contention would permit parties to alter appellate jurisdiction mid-stream by unilaterally changing the registered office, which was impermissible.

Conclusions

2.19 The Tribunal held that:

(a) Change of the corporate debtor's registered office after passing of the impugned order does not affect or curtail the Appellate Tribunal's jurisdiction to hear and decide the pending appeal on merits.

(b) The interlocutory application seeking dismissal of the appeal as non est and without jurisdiction was "without substance" and was rejected.

Overall Disposition

2.20 On the combined findings that: (i) there was no operational debt due from the corporate debtor to the operational creditor in respect of the impugned invoices; and (ii) in any event a genuine, pre-existing dispute was established on substantial and corroborated grounds, the Tribunal held that the Section 9 application ought not to have been admitted. The impugned order admitting the application and commencing CIRP was set aside, and the Section 9 petition was dismissed, with parties directed to bear their own costs.

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