NCLT Mumbai: Advance Payment Received by Corporate Debtor for Future Goods Supply Qualifies as Operational Debt Under IBC.

Case: Armaco Infralinks Pvt. Ltd. Versus B. S. Ispat Pvt. Ltd.

Facts of the Case

Armaco Infralinks Pvt. Ltd. (Operational Creditor) advanced ₹17,53,00,000 to B. S. Ispat Pvt. Ltd. (Corporate Debtor) between April 2021 and September 14, 2022, for the supply of coal. However, the Corporate Debtor supplied coal worth only ₹8,45,34,053, leaving an outstanding amount of ₹9,07,65,947.

On 15.09.2022, the Corporate Debtor issued Delivery Order (DO) No.1, proposing to supply 3,00,000 MT of coal at ₹5,285.71 per MT within two years. However, on 16.09.2022, the terms were amended, and DO No.1 was replaced with DO No.2, which required the Corporate Debtor to deliver 60,000 MT of coal within one year (by 15.09.2023) from Marki Mangli III, Majra, and Chinora coal mines.

Following this, the Operational Creditor remitted a total of ₹46,08,78,170 to the Corporate Debtor under DO No.2 between 16.09.2022 and 15.09.2023. However, as of 15.09.2023, the Corporate Debtor supplied only ₹16,72,41,710 worth of coal, and all deliveries were made only from Marki Mangli III Mines, at prevailing rates rather than the agreed price under DO No.2.

On 10.07.2023, the Corporate Debtor issued a Debit Note of ₹7,52,09,252, citing a rate difference in coal sales. However, this debit note was later reversed through a Credit Note for the same amount, which was also reflected in the Corporate Debtor’s books.

After adjustments, the Corporate Debtor had an outstanding liability of ₹35,94,98,100, which became due and payable.

Due to the Corporate Debtor’s failure to supply the remaining coal and the lack of any foreseeable supply, the Operational Creditor demanded a refund of the outstanding amount via email on 08.08.2024, requesting payment within seven days. Subsequently, a demand notice under Section 8 of IBC was issued on 04.09.2024. Since the Corporate Debtor did not pay the outstanding amount within 10 days of the demand notice, the Operational Creditor filed an insolvency petition under Section 9 of the IBC, 2016.

The Corporate Debtor contested the petition on multiple grounds:

1. The Delivery Order dated 16.09.2022 was unstamped and, therefore, inadmissible under the Indian Stamp Act, 1899, and Maharashtra Stamp Act, 1958.
2. The demand notice was not served to the registered office of the Respondent before filing the application, as required under Rule 6(2) of the IBC Rules, 2016.
3. The claim was disputed in the records of the National e-Governance Services Limited (NeSL), and per Section 8(2)(a) of the Code, this indicated the existence of a dispute.

Tribunal’s Decision

The Tribunal rejected the Corporate Debtor’s objections and ruled in favor of the Operational Creditor.

1. Unstamped Delivery Order: The Tribunal held that the inadmissibility of the Delivery Order due to improper stamping did not prevent the establishment of debt through other evidence. It was undisputed that the Operational Creditor had advanced payments for coal supply, and a significant portion of that amount remained outstanding.
2. Existence of Dispute: The Tribunal found that the only dispute raised pertained to the coal pricing and that too was raised after the issuance of Demand notice. The debit note issued by the Corporate Debtor after the demand notice was merely a last-minute attempt to fabricate a dispute.
3. NeSL Records: The Tribunal observed that the disputed default was recorded in NeSL, only after the demand notice was issued, further reinforcing that the dispute was artificially created.Curable Defects: The failure to serve an advance copy of the petition as required by Rule 6(2) of the IBC Rules, 2016 was deemed a procedural lapse that was rectified on 16.10.2024, making it a curable defect that did not impact the petition’s maintainability.
4. Threshold Limit: The Tribunal found that while a portion of the claim was disputed, the admitted amount exceeded the Rs. 1 crore threshold under Section 4 of the IBC, 2016.

Based on these findings, the Tribunal admitted the petition under Section 9 of the IBC, 2016, allowing the initiation of the Corporate Insolvency Resolution Process (CIRP) against B. S. Ispat Pvt. Ltd.

Our Comments

Advance payment refers to money paid before goods or services are delivered. Businesses often make advance payments to secure supply, mitigate risks, or fulfill contractual obligations. In this case, the Applicant paid the Respondent in advance for coal supply, but the agreed quantity was not delivered. Consequently, the remaining amount became a debt owed to the Operational Creditor.

According to Section 5(21) of the IBC, 2016, an operational debt refers to a claim related to goods or services provided. Advance payments for goods do not directly fall under this definition.

However, in M/s Consolidated Construction Consortium Ltd. v. M/s Hitro Energy Solutions (P) Ltd. (2022), the Supreme Court clarified that advance payments for future supply qualify as operational debt, as they relate to an operational transaction.

The NCLT followed this precedent, ruling that the advance given for coal supply had a direct link to the supply of goods, making it an operational debt despite not fitting the traditional definition. This decision reinforces the principle that defaults on advance payments for goods or services can be pursued under Section 9 of the IBC.

For a deeper dive into IBC and its evolving jurisprudence, check out our guide here: https://rdlawchambers.com/comprehensive-guide-on-insolvency-and-bankruptcy-code-and-nclt-proceedings/