NCLAT Sets Aside Rejection Of Insolvency Plea After Finding Corporate Debtor Had Admitted Outstanding Dues

The National Company Law Appellate Tribunal (NCLAT) at Delhi has set aside an order rejecting an insolvency application after finding that the corporate debtor had admitted outstanding dues in its reply to the statutory demand notice.

The tribunal also found that the corporate debtor could not later adopt a contrary stand during the proceedings. "The litigant cannot be permitted to approbate and reprobate," it observed.

A bench of Judicial Member Justice Mohd. Faiz Alam Khan and Technical Member Arun Baroka allowed the appeal filed by Uniworth Enterprises LLP against Starco Metaplast Private Limited.

Uniworth claimed dues of ₹2.83 crore, including interest, for the supply of pharma packaging materials. The parties later attempted a settlement under which Starco Metaplast agreed to pay about ₹1.91 crore in instalments. When the payment did not materialise, Uniworth initiated insolvency proceedings.

Before the appellate tribunal, Uniworth argued that the NCLT had wrongly accepted Starco Metaplast's plea of a pre-existing dispute despite its admission of the outstanding dues in its reply to the demand notice.

Starco Metaplast, on the other hand, maintained that disputes existed over the supply of goods and the appropriation of payments. It also claimed the outstanding amount had fallen below the statutory threshold because payments had been made against specific invoices.

Examining the reply to the demand notice, the tribunal found that Starco Metaplast had acknowledged an outstanding liability of about ₹1.91 crore, well above the IBC threshold

It also noted that the corporate debtor had agreed to pay the amount in monthly instalments after the operational creditor issued the agreed credit note.

"From the above reply to Section 8 demand notice, we find that the Corporate Debtor has accepted that the outstanding amount, which was to be paid as described above; however, the corporate debtor did not make any payment because the credit note was not issued by the Operational Creditor. Assuming that the Operational Creditor had not made a credit note of ₹4,084,275/-, we find that after deducting this amount, the outstanding, which was to be paid by the Operational Creditor is more than the threshold amount and the petition under Section 9 could be admitted.", the tribunal observed.

The tribunal also found that the corporate debtor later changed its stand. In its reply to the demand notice, it had acknowledged that the parties were maintaining a running account and that payments were not made invoice-wise. During the insolvency proceedings, however, it argued that payments had been made against specific invoices.

"However, at the stage of reply to Section 9 and during the arguments the Corporate Debtor has adopted a contrary reply and shifted its stand without any proof in support of the said stand, which is not permissible in law and reflects a mala fide conduct of the Corporate Debtor. The litigant cannot be permitted to approbate and reprobate.", the court observed.

Relying on Asset Reconstruction Company (India) Ltd. v. Tulip Star Hotels Ltd. and Industrial Credit and Development Syndicate v. Smithaben H. Patel, the tribunal observed that where a debtor does not indicate how payments are to be appropriated, the creditor is entitled to appropriate them in accordance with law.

The tribunal separately upheld the NCLT's order permitting the corporate debtor to place additional documents on record before the final adjudication. It relied on the Supreme Court's ruling in Dena Bank (now Bank of Baroda) v. C. Shivakumar Reddy while doing so.

Setting aside the NCLT's order rejecting the insolvency application, the tribunal directed the corporate debtor to pay ₹2.83 crore within 15 days. It further ordered that if the payment is not made within that period, the corporate debtor shall be admitted into insolvency under Section 9 of the Insolvency and Bankruptcy Code.