The National Company Law Tribunal (NCLT), Chennai Bench has held that advance paid to a corporate debtor for supply of goods or services, where the claim has a nexus with the provision of goods or services, constitutes “operational debt” within the meaning of Section 5(21) of the IBC. Therefore, such advance can be taken together with unpaid invoice dues for the purpose of determining whether the Section 4 threshold for a Section 9 application is met.
The Tribunal affirmed that acknowledgment of liability in balance confirmation letters and subsequent reply correspondence can extend limitation under Section 18 of the Limitation Act, and where the so-called dispute is not a genuine dispute as to quality or quantity and liability is otherwise admitted, the Section 9 petition is maintainable. Accordingly, CIRP was initiated against Sabash Engineering (Chennai) Pvt Ltd., and K.J. Vinod was appointed as the Interim Resolution Professional. The Tribunal also directed payment of Rs. 3 lakhs to the IRP and imposed the statutory moratorium under Section 14 of the IBC.
The Division Bench comprising Sanjiv Jain (Judicial Member) and Venkataraman Subramaniam (Technical Member) has recorded that it was an admitted case that the parties had a business relationship since 2013, and that both sides used to place purchase orders on each other in the ordinary course of business. The Tribunal noted that the petitioner had placed on record the purchase orders, invoices, ledger accounts, bank statement extracts, and confirmation of balance letters, by which the Corporate Debtor acknowledged liability and confirmed the outstanding balance of Rs. 1.13 crores.
The Tribunal held that the acknowledgments were made within the limitation period under Section 18 of the Limitation Act, 1963, and therefore the petition filed on 09.09.2024 was within limitation, being within three years from the last acknowledgment. The Tribunal further observed that although the respondent had raised a dispute in reply to the demand notice, the dispute was not in relation to the quality or quantity of the goods supplied. It also noted that, in the reply to the petition, the respondent had admitted liability and attributed non-payment to financial difficulties. The Tribunal treated this as a clear acknowledgment of debt.
The Tribunal identified the only defence of the Corporate Debtor as the contention that advance paid for supply of goods would not fall within “operational debt” under Section 5(21) and could not be clubbed with invoice dues in a Section 9 petition. Rejecting that defence, the Tribunal held that a claim arising out of advance payment made to a corporate debtor for supply of goods or services bears the required nexus with provision of goods or services and is therefore operational debt.
The Tribunal also reiterated that it does not matter who is the supplier or receiver of goods/services so long as there is a clear nexus between payment made and supply of goods/services. On that basis, the Tribunal held that both components, i.e., Rs. 64.05 lakhs under invoices and Rs. 49.46 lakhs as advance paid towards purchase, constituted operational debt, aggregating to Rs. 1.13 crores, which exceeded the threshold for maintaining the Section 9 petition.
Briefly, the petitioner is the Operational Creditor and the respondent is the Corporate Debtor. The registered office of the Corporate Debtor is within the jurisdiction of the Chennai Bench. The Corporate Debtor was incorporated in 2008 with authorised share capital of Rs. 2.50 crores and paid-up capital of Rs. 2.35 crores. In Part IV of the petition, the operational debt was stated as Rs. 1.13 crores.
The petitioner’s case was that it supplied M.S. Plates, P.M. Plates and other materials to the Corporate Debtor, and also placed purchase orders on the Corporate Debtor for manufacture and supply of engineering products for which it paid advances. According to the petitioner, the Corporate Debtor neither paid for the goods supplied by the petitioner nor supplied the engineering products for which advances had been received.
The breakup of the claim recorded in the order is: Rs. 64.05 lakhs towards outstanding against goods supplied and Rs. 49.46 lakhs towards advance paid towards purchase orders, aggregating to Rs. 1.13 crores. The petitioner relied on the ledger to show that the last payment was made on 18.10.2019, and relied on confirmation letters as acknowledgments of debt. A demand notice was issued, to which the Corporate Debtor replied. The petitioner had enclosed 23 invoices, purchase orders, ledger/bank statements, demand notice, reply and Form C issued by NeSL, along with confirmation of balance letters.
The respondent’s defence was that the petitioner had impermissibly clubbed two amounts, one allegedly due towards supplies and the other being an advance paid for supply of goods, to cross the Section 4 threshold of Rs. 1 crore. The respondent contended that the advance amount did not constitute operational debt and, at best, was financial debt. The respondent also stated that its financial difficulties arose from industry slowdown and the Covid-19 pandemic, and said it was taking steps to revive the business and would settle the petition at the earliest.
Appearances:
Adv Harimohana, for the Petitioner
Adv Vikram P. Jain, for the Respondent
