Advance Payment for Scrap Sale Qualifies as Operational Debt u/s 5(21): NCLAT Upholds CIRP Admission [Read Order]

The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, has upheld the admission of a Section 9 petition against the respondent holding that the advance payment for scrap sale qualified and fell under the purview of the operational debt under section 5(21

The dispute stems from a sale agreement dated 31.01.2019 between Vasundhara Seamless Stainless Tubes Pvt. Ltd. (Corporate Debtor) and B.N. Enterprises (Operational Creditor), under which machinery and scrap were to be sold for ₹1 crore. The operational creditor paid the entire consideration in three tranches between January and February 2019.

The agreement required removal of scrap within 30 days, but the creditor alleged that the debtor failed to permit lifting of the material and repeatedly sought either delivery or refund. Letters dated 01.05.2019, 12.11.2019, 06.06.2022, and 23.03.2023 were produced to evidence continuing demands.

The corporate debtor, under new management since 2021, contended that the scrap had been lifted in February 2019, thereby concluding the contract. It argued that the transaction was a one‑time commercial sale and not an operational debt under Section 5(21) of the IBC.

The appellant further alleged that the letters relied upon by the creditor were fabricated, acknowledged by a fictitious individual, and created to extend the limitation. It was also argued that balance sheet entries showing “Advance from Others – B.N. Enterprises” were mere accounting disclosures due to GST compliance issues, not acknowledgement of liability.

The appellant emphasised that the agreement contained no clause mandating refund of advance payments, and therefore no enforceable liability could arise. It also claimed that the Section 9 petition was time‑barred, as the alleged default dated back to 2019.

The appellant criticised the NCLT’s order as non‑speaking and mechanical, passed without considering objections, and argued that insolvency proceedings were being misused as a debt recovery mechanism.

In response, the operational creditor maintained that despite full payment, the scrap was never permitted to be removed. It relied on the debtor’s audited balance sheets for FY 2020‑21 and 2021‑22, which explicitly recorded the ₹1 crore advance under the creditor’s name, amounting to an acknowledgement of debt.

Citing the Supreme Court’s ruling in Consolidated Construction Consortium Ltd. v. Hitro Energy Solutions Pvt. Ltd. (2022), the creditor argued that advance payments for goods or services qualify as operational debt. It also pointed out that no reply was filed to the Section 8 demand notice issued in May 2023, and repeated opportunities to file a reply before NCLT were defaulted.

The NCLAT noted that the corporate debtor had indeed received ₹1 crore under the 2019 agreement but failed to produce evidence, such as delivery receipts or transport records, to substantiate its claim that the scrap had been lifted.

The two-member bench of Yogesh Khanna (Judicial Member) and Indevar Pandey (Technical Member) held that mere assertions could not rebut documentary evidence of repeated demands and balance sheet entries acknowledging liability. It was observed that advance payments made for goods or services fall within the ambit of operational debt, and failure to deliver or refund constitutes default under Section 3(12) of the IBC.

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On limitation, the Tribunal accepted that successive letters and audited accounts reflected continuing acknowledgement of liability, keeping the claim alive. It also noted the Supreme Court’s exclusion of the COVID‑19 period from limitation computation, which further validated the petition’s timeliness.

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