NCLT Delhi Admits CIRP Plea, Holds Advance Paid For Unsupplied Goods Qualifies As Operational Debt

The Delhi Bench of the National Company Law Tribunal (NCLT) has admitted insolvency proceedings against Swadesh Green Infra Limited after holding that an advance payment made under a commercial arrangement for the supply of goods qualified as an operational debt. The tribunal found that the supplier had failed to deliver the remaining goods.

A bench of Judicial Member Bachu Venkat Balaram Das and Technical Member Ravindra Chaturvedi observed:

“Thus, the advance payment was not a standalone financial transaction or a loan arrangement. The payment was intrinsically linked to a commercial transaction involving the purchase and supply of goods. The amount claimed by the Applicant arises directly out of the supply arrangement between the parties...Therefore, prima facie, the claim emanates from a transaction having a direct nexus with the provision and supply of goods and cannot be rejected merely on the ground that the Applicant had initially paid the consideration in advance.”

The tribunal was hearing a petition filed by Narindra & Narindra Steel Corporation against Swadesh Green Infra Limited.

Narindra & Narindra Steel Corporation stated that it placed a purchase order for iron and steel products and paid about ₹18.27 crore in advance. Goods worth about ₹17.24 crore were supplied.

This left an advance of about ₹1.03 crore against the undelivered material.

The creditor stated that Swadesh Green Infra later agreed to refund the outstanding amount and issued a cheque for ₹1 crore, which was dishonoured for insufficiency of funds. Despite receiving a statutory demand notice, the company neither made the payment nor raised any notice of dispute.

Opposing the plea, Swadesh Green Infra argued that the claim was not an operational debt because it arose from an advance payment. It also relied on email exchanges to claim there was a pre-existing dispute, maintained that the cheque was issued only as security, contended that the outstanding amount was below the statutory threshold, and argued that the insolvency process was being used as a recovery mechanism.

Narindra & Narindra Steel Corporation responded that the advance payment was part of a commercial supply transaction and therefore qualified as an operational debt. It also maintained that the cheque was issued towards an admitted liability and that no genuine pre-existing dispute existed.

The tribunal rejected the company's contention that the claim was not an operational debt, holding that the advance payment was intrinsically linked to the supply of goods rather than an independent financial transaction

It therefore rejected Swadesh Green Infra's contention that the claim could not be treated as operational debt merely because the payment had been made in advance.

The tribunal also rejected the company's contention that the cheque had been issued only as a security instrument. It noted that no contemporaneous material had been produced to support that claim. The tribunal found that the cheque supported the creditor's case that liability had been acknowledged.

The tribunal observed, “The dishonour of the cheque by itself may not conclusively establish default under the Code; however, it constitutes a relevant circumstance which cannot be ignored while appreciating the overall factual matrix. When viewed alongside the admitted commercial relationship, the advance payments made by the Applicant and the admitted supply of goods only to a limited extent, the issuance and dishonour of the cheque assumes evidentiary significance.”

Addressing the company's plea of a pre-existing dispute, the tribunal held that Swadesh Green Infra had not produced any contemporaneous material to substantiate it. It found that the email exchanges relied upon by the company reflected discussions on refunding the balance amount after it failed to complete the supply of goods.

The tribunal also held that the debit note relied upon to reduce the outstanding amount had not been shown to have been communicated to or accepted by the creditor. It further rejected the contention that the insolvency proceedings were not maintainable because proceedings under the Negotiable Instruments Act had also been initiated.

Holding that the material on record prima facie established the existence of an operational debt and default, and that no genuine pre-existing dispute requiring investigation had been demonstrated, the tribunal admitted the petition. It declared a moratorium and appointed Niraj Kumar as the Interim Resolution Professional.