Unilateral Credit Note and Ledger Write-off Not Proof of Debt Discharge: NCLT Initiates CIRP u/s 9 of IBC [Read Order]

The National Company Law Tribunal (NCLT), Cuttack Bench, in a recent case, rejected the petitioner’s defence that an operational debt of ₹18.56 crore stood settled through a unilateral credit note and ledger write-off.

Sree UGCL Projects Ltd., an operational creditor, filed the present petition under Section 9 of the IBC seeking initiation of insolvency proceedings against Geosphere Industries Pvt. Ltd. for non-payment of ₹18.56 crore, comprising ₹10.60 crore in principal and ₹7.96 crore as interest. The operational creditor relied on executed work orders, invoices, and ledgers showing acknowledgement of liability up to March 2021.

A demand notice under Section 8 remained unanswered in terms of payment.

The corporate debtor argued that the debt had already been extinguished through a Credit Note dated 30.01.2023 and a corresponding ledger write-off dated 31.03.2023, by which it had reversed the entire amount in its books and reversed GST liabilities.

Understanding Common Mode of Tax Evasion with Practical Scenarios, Click Here

The debtor further claimed that these entries reflected a mutual understanding of settlement between the parties and hence, no operational debt subsisted.

The operational creditor denied issuing or authorising any such Credit Note, terming it fabricated and unilaterally generated. It contended that there was no board resolution, approval, or communication evidencing consent to extinguish the debt. The creditor also produced documents showing the debt continued to be reflected as receivable in its audited statements.

The corporate debtor relied on accounting records and GST filings to argue that the entries had legal effect and showed satisfaction of debt. It further claimed that the operational creditor’s continued pursuit of insolvency amounted to abuse of process under Section 65 of the IBC, since the alleged claim was not enforceable.

The Bench found that the Credit Note and write-off were not supported by any mutual correspondence or signed settlement. It held that unilateral accounting entries cannot amount to “payment” or “satisfaction” of debt under the IBC and that such internal documents are insufficient to disprove default.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

The Tribunal observed that the authenticity of the Credit Note itself was disputed and lacked supporting authorisation from the operational creditor.

The Bench further rejected the plea under Section 65, holding that the invocation of the IBC in these circumstances could not be termed fraudulent or malicious. On the contrary, the operational creditor had produced credible evidence of debt and default.

Having found that the debt remained outstanding and enforceable, the NCLT admitted the petition under Section 9, commenced CIRP against Geosphere Industries Pvt. Ltd., appointed an IRP, and declared moratorium under Section 14 of the Code.

The Tribunal concluded that (i) unilateral credit notes and ledger write-offs do not extinguish an operational debt, (ii) no credible proof of settlement was shown, and (iii) the petition was bona fide. Consequently, the two-member bench of Deep Chandra Josh (Judicial Member) and Banwari Lal Meena (Technical Member) initiated CIRP, and both interim applications ( filed by the debtor were dismissed.

Support our journalism by subscribing to Taxscanpremium. Follow us on Telegram for quick updates