2026 (1) TMI 166 - AT - IBC

Advance payments for goods/services treated as operational debt under IBC Section 9; CIRP admission upheld despite assignment, cheque case

An appeal challenged admission of a Section 9 IBC application on grounds that advance payments were not 'operational debt,' default was not established, ... Commencement of CIRP proceedings - Admitted amount due to be paid to the Applicant, as referred to in the application filed under Section 9 of the Code, by the Appellant or not - admitted and established default or not - modalities required to be adopted for determining the aspect of default - exact date of default - Effect of registration of a Deed of Assignment - Effect of initiation of proceedings under Section 9 of the I & B Code when a notice under Section 138 of the Negotiable Instruments Act, 1881, and a criminal complaint have already been issued. HELD THAT:- It now stands settled that any amount paid as advance payment for goods or services under the terms of a contract (or otherwise) constitutes operational debt. Therefore, the contention raised before the learned Tribunal that the proceedings were not maintainable because the “advance amount” is not operational debt has been rightly rejected. The impugned order appropriately applies the principles laid down by the Hon’ble Supreme Court in Consolidated Construction Consortium Ltd. [2022 (2) TMI 254 - SUPREME COURT], holding that an advance amount falls within the ambit of operational debt. The implication of operational debt has also been attempted to be correlated by the Appellant by raising an objection that the site in question was handed over to the Appellant at a belated stage. This aspect was considered in detail by the Learned Tribunal while making its observations in paragraph 8 of the impugned order. It was observed that the plea regarding non-handover of the site by the Operational Creditor was not sustainable before the Learned Tribunal, nor was any attempt made to substantiate this allegation with evidence. The Learned Tribunal held that the plea was vague and related merely to advances, and such a vague plea could not be construed to satisfy the theory of non-handover of the site. Effect of registration of a Deed of Assignment - HELD THAT:- This issue, however, is no longer res integra, as it has already been settled that registration of an Assignment Deed is not a condition precedent under the I & B Code. In the present case, the Deed of Assignment dated 29.03.2023, executed between Mytrah Vayu (Som) Private Limited (the original Applicant under Section 9) and Mytrah Energy (India) Private Limited, had the effect of assigning the debt to the latter. The nature and effect of such an assignment do not require registration under the Code for the assignee to step into the shoes of the original applicant under Section 9 - The Learned Tribunal relied on the judgment in CFM Asset Reconstruction Pvt. Ltd. v. M.G. Finvest Pvt. Ltd. [2024 (1) TMI 1518 - NATIONAL COMPANY LAW TRIBUNAL, NEW DELHI], wherein it was held that assignment of debt is essentially a transaction between the creditor and the assignee, and such assignment is recognised by the Code as a valid mode of transfer of rights under Section 5(7) of the I&B Code - Therefore, registration of the Assignment Deed is not a precondition under law or the I & B Code for conferring the right to maintain proceedings under Section 9. Effect of initiation of proceedings under Section 9 of the I & B Code when a notice under Section 138 of the Negotiable Instruments Act, 1881, and a criminal complaint have already been issued - HELD THAT:- The issue regarding the effect of pendency of proceedings under Section 138 NI Act is now settled. The mere pendency or continuation of criminal proceedings under Section 138 or writ proceedings or an application under Section 482 Cr.P.C. has no bearing on proceedings under Section 9 of the I&B Code. The mere institution or pendency of proceedings under Section 138 NI Act cannot terminate or affect proceedings under Section 9 of the I & B Code, which must be independently decided. Furthermore, the cheque that was issued and later dis-honoured relates to the admitted amount due. The dis-honour of the cheque, a fact not denied, constitutes an admission of liability, though any criminal consequences arising under Section 138 NI Act will be separate and independent. Thus, owing to the undertaking, which has been mentioned in the communication of 07.07.2022 and reiterated in the letter dated 15.10.2022, and other email communication, which have been brought on record, they all compositely will amount to be an admission of the liability and payability of an Operational Debt and particularly in the context of the letter that was issued on 15.10.2022, where the Appellant had sought an extension of the payment of debt, which amounts to be an apparent admission of the liability or the debt payable to the Financial Creditor. The impugned order, which has been rendered by the Learned Tribunal dated 04.06.2024, does not call for any interference in the exercise of our Appellate Jurisdiction under Section 61 of the I & B Code, 2016 - Hence, the Company Appeal would stand closed. Issues: (i) Whether advance payments/advances under the contract constitute an operational debt for purposes of proceedings under Section 9 of the Insolvency and Bankruptcy Code, 2016; (ii) Whether there was an admission of debt/default by the Corporate Debtor sufficient to sustain the Section 9 application; (iii) Whether registration of the Deed of Assignment was a precondition for the assignee to maintain proceedings under Section 9; (iv) Whether pendency of proceedings under Section 138 of the Negotiable Instruments Act, 1881 affects initiation or continuation of proceedings under Section 9 of the IBC.Issue (i): Whether advance payments made to the Corporate Debtor constitute operational debt under Section 5(21) and permit issuance of a demand notice and Section 9 application.Analysis: The Tribunal applied Supreme Court authority establishing that a claim arising from advance payment made for goods or services under contract falls within the definition of operational debt; the availability of an invoice is not a sine qua non where other contractual documents demonstrate the claim; the impugned order relied on these principles.Conclusion: The advance payments constitute operational debt and the Section 9 application was maintainable in this regard (decision against the Appellant).Issue (ii): Whether the Corporate Debtor had admitted liability/default so as to justify admission of the Section 9 petition.Analysis: The Court considered communications, proforma invoice, payments, issuance of cheques by the Corporate Debtor, the letter dated 07.07.2022 and 15.10.2022 (including undertakings and extension of completion date), email exchanges and the dishonour of cheques; these collectively were treated as admissions of liability and default; the precise date of default was resolved by reference to the extension in the 15.10.2022 letter but variance in date did not vitiate proceedings so long as demand notice fell within limitation.Conclusion: There was an admission of debt/default by the Corporate Debtor and the Section 9 petition was rightly admitted (decision against the Appellant).Issue (iii): Whether registration of the Deed of Assignment was a precondition for the assignee to prosecute the Section 9 application.Analysis: The Tribunal relied on precedent recognizing assignment as a transaction between creditor and assignee which the Code recognises under Section 5(7); registration of the assignment deed is not a condition precedent to the assignee stepping into the original creditor's shoes for purposes of the Code.Conclusion: Registration was not required and the assignee had the right to maintain the Section 9 proceedings (decision against the Appellant on this point).Issue (iv): Whether pendency of proceedings under Section 138 of the Negotiable Instruments Act affects the maintainability of Section 9 proceedings under the IBC.Analysis: The Court applied settled principles distinguishing penal proceedings under the NI Act from insolvency proceedings under the IBC and followed authority holding that criminal proceedings under Section 138 do not impede civil insolvency proceedings; thus pendency of NI Act proceedings does not bar Section 9 proceedings.Conclusion: Pendency of Section 138 proceedings did not preclude admission of the Section 9 application (decision against the Appellant).Final Conclusion: The impugned order admitting the Section 9 application and commencing CIRP was upheld and the Company Appeal was dismissed; the appellate court found no reason to interfere with the admission order.Ratio Decidendi: Advance payments made under a contract for supply of goods or services constitute operational debt under Section 5(21) of the IBC; contractual communications and issuance of negotiable instruments acknowledging payment may amount to admission of liability and default; registration of an assignment deed is not a precondition for an assignee to maintain proceedings under Section 9.