Operational Creditor can only Trigger CIRP on Default in Payment: NCLAT [Read Order]

The Appeal filed by the operational creditors was dismissed by the National Company Law Appellate Tribunal, Principal Bench, New Delhi (NCLAT), which is composed of Justice Yogesh Khanna (Member (Judicial) and Mr. Ajai Das Mehrotra (Member (Technical)) since there was an existing dispute between the corporate debtor and the operational creditor.

The National Company Law Tribunal (NCLT), New Delhi, issued a judgment that is the subject of this appeal. It permits M/s Ambassador Logistics Pvt. Ltd. (Corporate Debtor) to participate in the Corporate Insolvency Resolution Process (CIRP) in accordance with Section 9 of the Insolvency and Bankruptcy Code, 2016.

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The operational creditor had submitted a petition for the Rs. 6 lakh operational debt plus interest at a rate of 24% annually.  The corporate debtor was receiving management and logistical support from the operational creditor.  Occasionally, a large number of bills were raised.  With the corporate debtor making partial payments that were adjusted using the FIFO (First in, First out) approach, both parties had kept a running account.

Before the NCLT, the CD asserted that the claim was precluded by the statute of limitations and that there was an existing disagreement over the amount demanded.  According to the operating creditor, the issue became apparent following receipt of the Section 8 notice.  The NCLT ruled that the petition was filed within three years and that the application was within the statute of limitations.  Although the CD did not present any convincing proof of a prior dispute, the NCLT determined that the operational creditor had adequately shown the debt's existence. Accordingly, the CD was allowed into CIRP under Section 9(5) of the IBC, 2016.

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After reviewing both parties' submissions, the NCLAT concluded that there was a clear disagreement over the claim based on the email exchanges between the parties.  According to the tribunal, the NCLAT found that the NCLT had erred in admitting the CIRP case because the operational creditor had not replied to the email in which the corporate debtor rejected any culpability.  The court cited a number of rulings to back up its position.

It is evident from  Sections 8 and 9 of the IBC that an operational creditor can only initiate the CIRP process in the event of an uncontested debt and a payment default.  Since IBC does not tolerate dishonesty or willful failure to settle an operational creditor's obligation, CIRP must start if the operational creditor's claim is uncontested and the operational debt is still outstanding.  The Operational Creditor's application to start CIRP must be denied, nevertheless, if the debt is contested.

In summary, the NCLAT reversed the corporate debtor's admission into CIRP by overturning the NCLT's contested order and granting the appeal.

To Read the full text of the Order CLICK HERE

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