Operational debt invoices and internal liability transfer journal entries under IBC s.9 held time-barred; insolvency claim rejected.
An application under IBC s.9 based on alleged operational debt was held time-barred because any acknowledgement after expiry of the three-year limitation does not extend limitation, and a journal entry transferring earlier Jamnagar-unit liabilities to another unit merely shifted book entries without creating a fresh cause of action; accordingly, invoices already beyond three years could not be enforced in insolvency and the threshold was not met. A signed ledger/balance confirmation was found ambiguous and lacking any clear promise to pay, so it did not attract Contract Act s.25(3) to create a fresh contractual obligation; the debt therefore remained time-barred. Interest was disallowed as invoices contained no interest terms and the computation was arbitrary. The appeal was dismissed.
1. ISSUES PRESENTED AND CONSIDERED
(i) Whether the operational debt relied upon for admission under Section 9 was within limitation, particularly where older invoices of one unit were transferred by journal entry into another unit's ledger and adjusted against later transactions.
(ii) Whether ledger entries/balance confirmation and a journal transfer entry constituted a valid acknowledgement of debt extending limitation under Section 18 of the Limitation Act, 1963, or a promise to pay a time-barred debt under Section 25(3) of the Contract Act, 1872.
(iii) Whether, after excluding time-barred components, the claim met the statutory threshold for initiation of the insolvency process under Section 9.
(iv) Whether interest claimed formed part of an admissible operational debt where the invoices relied upon did not provide for interest.
2. ISSUE-WISE DETAILED ANALYSIS
Issue (i) & (iii): Limitation of principal operational debt and impact on threshold
Legal framework (as discussed): The Court examined limitation principles applicable to operational debt under the Code and evaluated whether the claim, after removing time-barred invoices, still satisfied the threshold for Section 9 admission. The Court also considered the plea for exclusion of time during the Covid-19 period but only in relation to whether limitation had already expired for particular invoices.
Interpretation and reasoning: The Court found that the earliest four invoices (dated in 2016 and forming a substantial portion of the claimed principal) were already time-barred by the time the insolvency petition was filed in 2022. It rejected the attempt to treat later book adjustments and the shifting of balances between unit-ledgers as creating a later "due date" or extending limitation. The Court held that unilateral adjustment of purchases against earlier invoices and a later journal transfer were an "innovative" method to surpass limitation, and limitation could not be revived merely by shifting entries from one account to another while retaining the original transaction dates and character. The Covid-19 exclusion period was held unavailable for those invoices because the three-year limitation had already lapsed before the relevant cut-off, so exclusion could not revive an already time-barred claim.
Conclusion: Since key invoice components were time-barred and had to be excluded, the remaining principal debt fell below the required threshold; therefore, the Section 9 petition was not fit for admission and the dismissal on threshold grounds was upheld.
Issue (ii): Whether ledger/balance confirmation and journal entry amounted to acknowledgement under Section 18 or promise under Section 25(3)
Legal framework (as discussed): The Court considered whether the ledger materials relied upon could operate as an acknowledgement of liability extending limitation under Section 18 of the Limitation Act, 1963, and alternatively whether they could be treated as a promise to pay a time-barred debt under Section 25(3) of the Contract Act, 1872.
Interpretation and reasoning: The Court analysed the ledger and the journal entry transferring liabilities of the closed unit into another unit's account. It held that the document functioned only as an internal accounting transfer/balance confirmation and did not amount to an acknowledgement that could grant a fresh limitation period for the original invoices. The Court reasoned that journal entries shifting liabilities between accounts do not alter original transaction dates or confer "new life" for limitation purposes. It further held that even if treated as an acknowledgement, it could not assist where the underlying invoices were already beyond three years for limitation calculation under the Code. On Section 25(3), the Court found the ledger/balance confirmation did not contain a clear promise to pay; it was ambiguous and routine in nature, lacking promise language and therefore did not create a fresh contractual obligation capable of overcoming time-bar for IBC purposes.
Conclusion: The ledger and journal transfer were held insufficient to extend limitation under Section 18 or to constitute an enforceable promise under Section 25(3); the operational debt remained time-barred to the extent of the older invoices.
Issue (iv): Admissibility of interest claim
Legal framework (as discussed): The Court examined whether interest could be claimed as part of the operational debt based on the invoices relied upon.
Interpretation and reasoning: The Court found that interest was not payable because the invoices in question did not contain terms and conditions providing for interest, and the interest component was therefore arbitrarily calculated without contractual basis on those invoices.
Conclusion: The interest claim was rejected; it did not support enhancement of the operational debt for Section 9 admission.
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