2026 (1) TMI 394 - AT - IBC

Trade advance under supply contract treated as financial debt under IBC s.5(8); s.7 filing held timely after limitation extension.

A dispute arose whether an advance under a supply arrangement constituted a 'financial debt' so as to permit a s.7 IBC application. NCLAT held that the ... Rejection of Section 7 petition filed by the Appellant solely on the ground of limitation - date of default is well within the limitation period of 3 years or not - appellant is a Financial Creditor as claimed by the Appellant or Operational Creditor as claimed by the Respondent. Whether the Appellant is Financial or Operational Creditor? - HELD THAT:- The second proviso to Clause 7 clearly shows that the trade advance gets converted into a debt with time value of money in case of default by the respondent, so the underlying contract shows the time value of money ingrained in the debt in case of default by the Respondent - it is also noted that the Adjudicating Authority has discussed all the relevant provisions of the Code and related Judgments cited by either side and held that the aforesaid trade advance is a financial debt with time value of money - there are no reason to disagree with the findings of Adjudicating Authority. Time limitation - HELD THAT:- Based on the directions in the Suo-Motu Judgement [2022 (1) TMI 385 - SC ORDER] the balance period of limitation from 15.03.2020 has to be added to 01.03.2022 to get the revised date of limitation. In the instant case the period is one year 8 months and 6 days. The revised end date of limitation would then be 06.11.2023. The section 7 application in this case was filed on 28.10.2022 which was well within limitation period. The Adjudicating Authority has rightly classified the Appellant as Financial Creditor. However, the issue of limitation has been decided by the Adjudicating Authority without taking into account the directions of Hon’ble SC in suo motu proceeding (supra) due to which the Section 7 application was not found maintainable. Whereas the same is well within the limitation period after applying a grace period as per Hon’ble SC’s order. The appeal is allowed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether the 'trade advance' arrangement under the parties' agreement, including its conversion mechanism, constituted a financial debt, making the applicant a financial creditor for purposes of initiating proceedings under Section 7 of the Code. (ii) Whether the Section 7 application was barred by limitation, specifically: (a) whether the email dated 27.12.2019 amounted to an acknowledgment extending limitation; and (b) whether the COVID-19 limitation exclusion directions of the Supreme Court applied so as to render the filing within time. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Nature of the trade advance-financial debt and status as financial creditor Legal framework: The Court examined whether the transaction had the character of a financial debt, including the element of time value of money, based on the contractual terms placed on record. Interpretation and reasoning: The Court relied on the agreement provisions governing adjustment of the trade advance through trade discounts against purchase targets, and, critically, the proviso stipulating that any unadjusted trade advance 'shall be deemed to be a loan' carrying interest at 1% per month (12% per annum) from the date of release until actual repayment. The Court held that this contractual deeming clause and interest component embedded the time value of money into the obligation upon default, converting the arrangement into a debt with time value of money. It found no reason to disagree with the Adjudicating Authority's conclusion on this classification. Conclusion: The Court affirmed that the applicant was correctly classified as a financial creditor and the liability as a financial debt in the given contractual framework. Issue (ii): Limitation for the Section 7 application (acknowledgment and COVID-19 exclusion) Legal framework: The Court evaluated limitation on the basis of the prescribed three-year period from the date of default as computed by the Adjudicating Authority, and applied the Supreme Court's directions excluding time for limitation during the COVID-19 period. Interpretation and reasoning (acknowledgment): The applicant relied on an email dated 27.12.2019 as acknowledgment. The Court read the email and found that it did not contain a 'clear cut acknowledgement of debt' and merely referred to poor business conditions and difficulties. Accordingly, the Court declined to treat the email as an acknowledgment extending limitation. Interpretation and reasoning (COVID-19 exclusion): The Court held that the Adjudicating Authority erred by not applying the Supreme Court's exclusion of the period from 15.03.2020 to 28.02.2022 for limitation purposes. It computed the balance limitation remaining as on 15.03.2020 (one year, eight months, and six days) and added it from 01.03.2022, arriving at a revised limitation end-date of 06.11.2023. Since the Section 7 application was filed on 28.10.2022, it was within limitation. Conclusion: The Court held the Section 7 application was within limitation after applying the COVID-19 exclusion directions, notwithstanding rejection of the acknowledgment argument. The dismissal on limitation was set aside, and the insolvency petition was restored for consideration by the Adjudicating Authority. Additional conclusively decided point (raised by respondent): The Court rejected the objection that the matter was merely contractual/specific performance or that parallel civil proceedings/contract validity disputes barred insolvency initiation. It held that inability to meet debt obligations justified initiation of CIRP, and civil recovery proceedings could continue independently of CIRP.