Advance Payment Received by Corporate Debtor for Future Supply of Goods is Operational Debt Under IBC: NCLT [Read Order]

The National Company Law Tribunal ( NCLT ) Mumbai has held that the payment received in advance by the Corporate Debtor for the future supply of goods constitutes an operational debt.

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In order to supply coal, B. S. Ispat Pvt. Ltd. (Corporate Debtor) received ₹17,53,00,000 from Armaco Infralinks Pvt. Ltd. (Operational Creditor) between April 2021 and September 14, 2022. But only ₹8,45,34,053 worth of coal was supplied by the corporate debtor throughout this time. For the supply of coal, the Operational Creditor advanced a sum of Rs. 9,07,65,947/- (Rupees Nine Crores Seven Lakhs Sixty-Five Thousand Nine Hundred and Forty Seven only), which was already past due and outstanding with the Corporate Debtor.

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Due to the fact that there is no chance of coal supply in the near future and that the Operational Creditor borrowed the funds advanced to the Corporate Debtor from financial institutions, the Operational Creditor demanded in an email dated August 8, 2024, that the Corporate Debtor return the funds within seven days of receiving the email.

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The instant petition under section 9 of the code was filed because the corporate debtor did not pay the admitted operational debt within the statutory 10-day period following the issuance of the Form 3 Demand Notice.

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Accordingly, the Corporate Debtor argued that, in light of Section 35 of the Indian Stamp Act of 1899 and Section 34 of the Maharashtra Stamp Act of 1958, the unstamped Delivery Order of September 16, 2022, cannot be entered into evidence since it is an unstamped instrument. Also argued that as per Rule 6(2) of the IBC Rules, 2016, the Applicant should serve a copy of the application to the registered office of the Respondent, however, the same was served to the Respondent after filing of the application.

The Tribunal noted that the Respondent's claim that the DO dated September 16, 2022, is inadmissible because it is not stamped is without validity. It is widely established that an unstamped or inadequately stamped document does not exclude the use of other evidence to demonstrate the existence of debt in applications under sections 7 or 9 of the code. It is undeniable that the operation creditor in this case paid the corporate debtor for the coal delivery, and that payment is still pending as of right now.

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The  bench of Justice V. G. Bisht (Retd.) (Judicial Member) and Sh. Prabhat Kumar (Technical Member) observed that the rate at which the coal must be provided is the only point of contention in this scenario. A review of the parties' correspondence reveals that the corporate debtor had not brought up any issues prior to the demand notice being sent. After the demand letter was sent, the corporate debtor issued a debit note only to start a dispute. After the demand notice was issued, on September 4, 2024, the date of default was registered with NeSL.

The Tribunal came to the conclusion that the Operational Creditor has the right to request a refund of the advance and that the Corporate Debtor's defense of pre-existing issues is just a charade to hide its inability to provide the goods. As long as the Respondent Company has an undeniable debt and a payment default, the argument that it is not "insolvent" or "bankrupt" by any standards is moot.

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According to the NCLT, the applicant fixed the deficiency on October 16, 2024, by serving an advance copy of the petition in accordance with Rule 6(2) of the IBC Rules, 2016. In contrast to the confessed debt above the threshold limit under section 4 of the law, the corporate debtor has only partially contested the claim. Moreover, section 8(2) of the code does not prohibit adjudication because of the existence of a dispute listed on the NeSL.

While allowing the appeal, the Tribunal concluded that an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (the Code) can be admitted if it exceeds the threshold limit prescribed under Section 4 of the Code.

To Read the full text of the Order CLICK HERE

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