TaxTMI 
TaxTMI 
2025 (10) TMI 974
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....red to as Code) filed by Mr. Hiralal Bhimjibhai Kumavat, the proprietor of B.N. Enterprises (Operational Creditor) and Respondent No. 2 herein. The Adjudicating Authority vide the impugned order directed the initiation of the Corporate Insolvency Resolution Process (CIRP) against Vasundhara Seamless Stainless Tubes Private Limited, the Corporate Debtor (CD). 2. The Appellant Sh. Rakesh Bhailabhai Patel, the suspended director of the Corporate Debtor, has preferred this appeal challenging the admission order on the grounds that the petition was entertained despite serious disputes as to the debt, fabrication of documents, inconsistency in the alleged dates of default, and non-fulfilment of statutory prerequisites under the Code. The Corporate Debtor represented through its Interim Resolution Professional Sh. Sachin Naveen Sinha is the Respondent No.1 herein. 3. The brief facts of the case are as given below: i. The Corporate Debtor, Vasundhara Seamless Stainless Tubes Private Limited, which had been incorporated in the year 2014, was engaged in the business of manufacturing structural metal products, tanks, reservoirs and steam generators. ii. The CD came und....
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.... petition under Section 9 of the Code, before the NCLT, Ahmedabad, being C.P. (IB)/198/AHM/2023, claiming refund of the said amount of Rs. 1 Crore. ix. During the proceedings CD sought time to file its reply, however, the same was not filed despite several opportunities being given to them. On 23.04.2024, the Adjudicating Authority proceeded ex parte and closed its right to file a reply. Subsequently, Respondent No. 1 moved an interlocutory application (I.A. No. 1708 of 2024) on 04.07.2024 seeking recall of the ex parte order and an opportunity to file a detailed reply. x. The Adjudicating Authority, after heard the final arguments from both sides on 02.08.2024, and after obtaining the written submissions from both the parties, passed the order dated 22.08.2024 admitting the Section 9 petition, thereby initiating CIRP against the Corporate Debtor. The present appeal arises from the aforesaid order. Submission of the appellant 4. In his opening remark Ld. Counsel for the Appellant stated that the present Appeal arises out of the impugned order dated 22.08.2024 passed by the L....
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.... can be said to exist. 10. Ld. Counsel further points out that entries in the Corporate Debtor's balance sheet merely reflect accounting disclosures necessitated by the Respondent's failure to provide GSTIN details as required under Clause 5 of the Agreement. Since no GST details were shared, invoices could not be issued, and the advance amount was carried forward only for compliance purposes. Such accounting entries cannot be treated as acknowledgment of debt. The Supreme Court has consistently held that balance sheet entries, unless accompanied by unequivocal intent to admit liability, cannot constitute acknowledgment under Section 18 of the Limitation Act. In this regard he invited our attention to the following Judgments of Hon'ble Supreme Court: 'Asset Reconstruction Co. v. Bishal Jaiswal (2021) 6 SCC 366; SBI v. Krishidhan Seeds (P) Ltd. (2023) 1 SCC 209'; 'S. Natarajan v. Sama Dharman (2021) 6 SCC 413'; 'Khan Bahadur Shapoor Fredoom Mazda v. Durga Prasad Chamaria (1962) 1 SCR 140'. 11. Without prejudice, Ld. counsel submits that even if arguendo any operational debt were assumed, the element of default under Section 3(12) of the IBC is absent. Respondent No. 2 was obli....
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.... beyond the limitation period of three years. There is no acknowledgment under Section 18 of the Limitation Act to save limitation. Thus, the application is nothing more than a debt recovery exercise camouflaged under the guise of insolvency proceedings, which is impermissible under the scheme of the IBC. 18. Ld. Counsel finally submits that the impugned order is liable to be set aside as it is a non-speaking order. The Ld. NCLT, while admitting the Section 9 petition, simultaneously allowed IA No. 1078/2024 and took the Corporate Debtor's reply on record. Despite this, the impugned order does not deal with a single submission, document, or objection raised by the Appellant. 19. The order summarily dismisses the Appellant's defence as irrelevant without assigning any reasons. Such adjudication violates the settled principles of natural justice. It is trite law that admission under Section 9 is not a mere procedural exercise; the Adjudicating Authority is required to determine whether an operational debt exists, whether it is undisputed, and whether a default has occurred. By failing to examine these core elements, the Ld. NCLT abdicated its statutory function. 20. The impu....
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....ations. 27. He further submitted that the claim of the Operational Creditor arises from supply of goods and services in connection with the sale of scrap and machinery and therefore constitutes an "operational debt" under Section 5(21) of the Code. The present claim is thus fully maintainable under Section 9 of the Code. 28. The learned counsel places reliance on the judgment of the Hon'ble Supreme Court in Consolidated Construction Consortium Ltd. v. Hitro Energy Solutions Pvt. Ltd., (2022) 7 SCC 164, wherein it was categorically held that even a purchaser/procurer who makes advance payment for goods or services to the Corporate Debtor would qualify as an Operational Creditor. Hence, the Respondent's status as an Operational Creditor stands firmly established. 29. He further submitted that despite repeated requests, the Corporate Debtor did not permit the Operational Creditor to collect the machinery and scrap as per the terms of the Agreement. The letters evidencing these requests bear the acknowledgment and stamp of the Corporate Debtor. 30. Ld. Counsel stated that, since the Corporate Debtor remained unresponsive, the Operational Creditor, constrained by such inacti....
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....es its mala fide intent as it was filed over a year after the last letter of the Operational Creditor and more than a year after the demand notice, merely to create an illusion of dispute. Such afterthought actions cannot invalidate the Section 9 proceedings. 39. He submitted that it is settled law that disputes raised after issuance of the demand notice cannot be termed pre-existing. Moreover, a mere marking of a debt as "disputed" in the NESL record does not suffice to establish the existence of a bona fide dispute under the IBC, unless supported by documentary proof predating the demand notice. 40. The counsel submits that proceedings under Section 9 of the Code are inherently summary in nature. The Adjudicating Authority is not expected to conduct a detailed trial or evaluate evidentiary aspects beyond determining whether (i) an operational debt exists, (ii) a default has occurred, and (iii) there is no pre-existing dispute. 41. This position has been consistently upheld by this Hon'ble Tribunal, including in 'Indo Alusys Industries Ltd. v. SMW Steel Pvt. Ltd. [Company Appeal (AT) (Ins.) No. 409 of 2019]', where it was held that proceedings under Section 9 of the Code ....
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....utes a legally recoverable operational debt, and whether the Corporate Debtor's failure to deliver the contracted goods or refund the amount amounts to a default as contemplated under Section 3(12) of the IBC. The Appellant (suspended director) contends that no operational debt exists, as the transaction was fully concluded in 2019 and the scrap was lifted by the Operational Creditor. The Respondent/Operational Creditor on the other hand, asserts that despite advance payment, the Corporate Debtor failed to permit lifting of the scrap or refund the consideration, thereby committing default. 49. The Appellant argues that the Section 9 application was wrongly admitted since the debt claimed by Respondent No. 2 does not qualify as an "operational debt". It is his submission that the Agreement dated 31.01.2019 was merely a one-time sale contract for scrap and machinery. Under Clause 1 of the Agreement, the Operational Creditor was required to lift the scrap within thirty days from the date of execution, and the Corporate Debtor had no further obligation beyond informing local authorities prior to removal. According to the Appellant, the Operational Creditor had lifted the scrap durin....
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....rational Debt encompasses amount paid in advance for the purchase of goods and services. 54. In order to determine whether an "operational debt" exists, the Tribunal must examine whether the claim arises out of (i) provision of goods or services, or (ii) a transaction having a direct nexus with operation of the corporate debtor. It is an admitted fact that the Corporate Debtor received Rs. 1 crore from the Operational Creditor under the Sale Agreement dated 31.01.2019. The Corporate Debtor's argument that this amount ceased to be a debt, because the scrap was lifted is unsupported by any evidence such as delivery receipts, gate passes, weighment slips, or transport records. The mere assertion that the scrap was "lifted" cannot rebut the consistent documentary trail of letters written by the Operational Creditor spanning four years, repeatedly seeking delivery of scrap or refund of payment. These letters bear the Corporate Debtor's seal and acknowledgement, which have not been convincingly explained. There is no reply on record from the Appellant to controvert this even after receiving the notice of default u/s 8 of the code in May 2023. 55. The further argument of the Appella....
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....re, the Operational Creditor's claim for refund of advance directly flows from the Corporate Debtor's failure to deliver goods, and therefore constitutes an operational debt under Section 5(21) of the Code. 58. We note that the audited financial statements of the Corporate Debtor further corroborate the Respondent's case. We take a look at the last Balance Sheet of CD for the FY 2021-22 which is on record. It is to be noted that the balance sheet of FY 2021-22 has been prepared during the period the new management was in place The relevant pages of the Balance Sheet of the CD are at pages 212 and 217 of the appeal are extracted below: We see clearly that Note 6 in the Balance sheet only gives the total amount of advance received from others. The details of the same are furnished in Schedule to the Note 6. None of these entries reflect any qualification by the Auditors, thereby acknowledging debt without any conditions. Exactly identical entries are available in Balance Sheet of previous financial years from 2019-20 onwards. 59. The entries under "Advance from Others - B.N. Enterprises" appearing in successive financial years clearly reflect the Corporate Debtor's continuin....
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.... this regard we also note that the Hon'ble Supreme Court in Asset Reconstruction Company (India) Ltd. v. Bishal Jaiswal, (2021) 6 SCC 366, decisively held that an acknowledgment of liability in a company's balance sheet constitutes acknowledgment under Section 18 of the Limitation Act, thereby restarting limitation. This principle was reaffirmed in Dena Bank v. C. Shivakumar Reddy, (2021) 10 SCC 330, where the Court observed that acknowledgment in a balance sheet or in a one-time settlement proposal renews the period of limitation for the purpose of proceedings under the IBC. 65. Accordingly, we hold that the Adjudicating Authority rightly admitted the Section 9 application. As it was filed within the limitation period and the existence of operational debt and default, is found to be legally correct and based on sound appreciation of facts and law. 66. The second issue raised by the appellant relates to pre-existing disputes. Under the Code, a Corporate Debtor cannot be dragged into insolvency proceedings if there exists a genuine and pre-existing dispute between the parties regarding the debt claimed. Section 9(5)(ii)(d) of the Code specifically empowers the Adjudicating Aut....
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....ely civil nature arising out of breach of contract, which could not be the subject matter of insolvency proceedings under the IBC. The Appellant thus maintains that the alleged debt was never admitted and that there existed a genuine dispute as to both facts and documents. 71. Per Contra, the Respondent 2/ Operational Creditor has categorically denied the Appellant's allegations of fabrication and fraud. It is his submission that no dispute of any kind was ever raised by the Corporate Debtor at any time prior to the demand notice dated 01.05.2023. The Respondent points out that all the letters relied upon were duly signed and acknowledged by the Corporate Debtor's authorized office with its official seal, and that those communications clearly established the ongoing default and repeated requests for refund of the Rs. 1 crore advance. 72. It is the contention of the Respondent that the so-called "police complaint" dated 20.07.2024 was filed long after the Section 9 application had been admitted and reserved for orders, and therefore cannot qualify as a "pre-existing dispute." According to the Respondent, the complaint was lodged nearly five years after the transaction; more th....
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...., the Court does not need to be satisfied that the defence is likely to succeed. The Court does not at this stage examine the merits of the dispute except to the extent indicated above. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application." 75. In the present case, we note that the demand notice under Section 8 was issued on 01.05.2023. The only document relied upon by the Appellant to show a dispute is a police complaint dated 20.07.2024-filed more than fourteen months later. There is not a single piece of evidence on record to suggest that the Corporate Debtor raised any objection to the authenticity of the letters, denied the liability, or communicated any disagreement regarding the Rs. 1 crore transaction before that date. Even during the entire period between 2019 and 2023, there is no correspondence from the Corporate Debtor questioning the Operational Creditor's repeated communications or denying its obligation to refund. 76. On the contrary, the record shows that the letters from the Operational Creditor dated 01.05.2019, 12.11.2019, 06.06.2022, and 23.03.2023 were duly receiv....