Appeal fails as Section 9 IBC claim cannot prove crossing Section 4 threshold after Section 10A invoice exclusions

NCLAT upheld the Adjudicating Authority's dismissal of the operational creditor's Section 9 IBC application for failing to meet the statutory threshold under Section 4. The Appellant contended that, even after excluding invoices falling within the Section 10A suspension period, the outstanding principal and interest exceeded Rs. 1 crore. NCLAT found the revised computation defective: interest was calculated on a straight-line basis for 36 months without invoice-wise correlation, period-wise breakup, or clear exclusion of Section 10A-period invoices. As the supporting invoice dated 21.05.2024 lacked clarity and could not reliably establish that the claim crossed the threshold, the dismissal of the Section 9 application and the appeal was affirmed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether a Section 9 application founded on a default that commenced prior to the Section 10A period but continued during and beyond the Section 10A period is barred by Section 10A of the Insolvency and Bankruptcy Code.

1.2 Whether, after excluding invoices and interest hit by the Section 10A embargo and considering the manner of interest computation, the operational debt claimed in the Section 9 application meets the threshold limit prescribed under Section 4 of the Insolvency and Bankruptcy Code.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Application of Section 10A to a continuing default

Legal framework (as discussed)

2.1 The Tribunal considered Section 10A of the Insolvency and Bankruptcy Code regarding the embargo on filing applications in respect of defaults arising during the specified "Section 10A period". It also adverted to the threshold requirement for initiation of insolvency under Section 4 and initiation by an operational creditor under Section 9.

Interpretation and reasoning

2.2 The Tribunal noted that the default was asserted to have arisen from the first invoice dated 07.03.2019 and that the default continued during and beyond the Section 10A period.

2.3 It accepted the contention that the default in the present case had commenced prior to the Section 10A period and that such pre-10A defaults are not barred by Section 10A, even if they continue during the embargo period.

Conclusions

2.4 The Tribunal held that the filing of the Section 9 application was not barred by Section 10A and was, in principle, legally tenable on that count.

Issue 2 - Satisfaction of threshold limit under Section 4 in light of Section 10A and interest computation

Legal framework (as discussed)

2.5 The Tribunal examined Section 4 of the Insolvency and Bankruptcy Code regarding the minimum default threshold of Rs. 1 crore for admission of an application under Section 9.

2.6 It also considered the effect of Section 10A on the computation of debt and interest, specifically that invoices raised, and interest accruing, during the Section 10A period cannot be taken into account for determining default for the purpose of initiating insolvency proceedings.

Interpretation and reasoning

2.7 The computation in Part IV of the Section 9 application showed: (a) total invoices of USD 798,247.40; (b) part-payments of USD 716,421.98; (c) net principal of USD 81,825.42; and (d) interest of USD 44,151.57 calculated as "36 month straight line on OS balance @ 1.5% per month upto 21.05.2024", giving a total of USD 125,976.99 equivalent to more than Rs. 1 crore.

2.8 The Tribunal noted that this interest figure was entirely based on a single invoice dated 21.05.2024, which described only a lump-sum "INTEREST 36 MONTH STRAIGHT LINE ON OS BALANCE 1.5% per month upto 21.05.2024" for USD 44,151.57, without disclosing (i) invoice-wise breakup, (ii) the period for which interest was computed on each invoice, or (iii) how part-payments were applied.

2.9 The Adjudicating Authority had held that, for determining the threshold, invoices raised during the Section 10A period and interest thereon must be excluded and that the interest invoice dated 21.05.2024 did not make such exclusion, thereby going against the intent and spirit of Section 10A.

2.10 The Tribunal took note that the Adjudicating Authority had given the applicant an opportunity on 06.12.2024 to file written submissions clarifying the calculation methodology on maintainability, which was not availed.

2.11 Before the Tribunal, the appellant asserted orally that all invoices within the Section 10A period (six invoices from 23.04.2020 to 20.10.2020) and interest thereon had been excluded and that part-payments during the Section 10A period had been adjusted, and produced a revised rupee-based tabular computation (filed only by way of written submissions after the hearing was reserved) showing:

(a) Net principal amount (excluding Section 10A invoices): Rs. 4,66,49,342.20

(b) Net part-payments (after adjusting 10A invoices): Rs. 3,98,25,075

(c) Total outstanding principal: Rs. 68,24,267.20

(d) Interest at 1.5% per month for 36 months on Rs. 68,24,267.20: Rs. 36,84,104.29

(e) Total claimed amount: Rs. 1,05,08,371.49

2.12 The Tribunal observed that this revised chart:

(i) was not supported by any affidavit despite a specific opportunity earlier granted;

(ii) remained opaque as it did not explain how the 36-month period was computed with reference to each invoice, nor provide invoice-wise segregation following exclusion of Section 10A period invoices; and

(iii) resulted in a total amount (Rs. 1,05,08,371.49) only marginally lower (by about Rs. 60,000) than the original figure based on the impugned interest invoice (Rs. 1,05,68,291.58), which was inconsistent with the claimed exclusion of Section 10A invoices and interest thereon and thus raised doubts about the correctness of the exclusion and the computation.

2.13 The Tribunal further noted that the interest invoice dated 21.05.2024 appeared to be based on an external auditor's communication that also lacked computation details and therefore could not cure the deficiency.

2.14 The Tribunal held that, in the absence of a clear, demonstrable, and invoice-wise calculation of interest excluding the Section 10A period, and with the interest computation being cryptic and ambiguous, the Appellant had failed to establish that the operational debt including interest validly crossed the mandatory threshold of Rs. 1 crore.

Conclusions

2.15 The Tribunal affirmed the finding that the interest invoice dated 21.05.2024 could not be relied upon as a valid basis for determining the interest component and, consequently, for ascertaining satisfaction of the threshold requirement under Section 4.

2.16 The Tribunal held that, in view of the ambiguous and inadequately substantiated interest computation, the Appellant did not satisfactorily demonstrate that the claim amount, after exclusion of Section 10A period invoices and interest thereon, met the statutory threshold of Rs. 1 crore.

2.17 The Tribunal therefore found no infirmity in the dismissal of the Section 9 application for not meeting the threshold limit under Section 4 and dismissed the appeal, expressly leaving open the merits of debt and default and reserving liberty to the Appellant to seek remedies before any other competent forum.

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