Invoice Dues, Supply Advances Can Be Clubbed As Operational Debt Under IBC: NCLT Chennai

The Chennai Bench of the National Company Law Tribunal (NCLT) on 28 April held that outstanding invoice dues and advance payments made towards supply of goods can be clubbed together as “operational debt” under the Insolvency and Bankruptcy Code, 2016 (IBC) for the purpose of maintaining a petition under Section 9 of the IBC.

Technical Member Venkataraman Subramaniam and Judicial Member Sanjiv Jain admitted the application filed by Enmas India Pvt. Ltd. seeking initiation of Corporate Insolvency Resolution Process (CIRP) against Sabash Engineering, finding that the statutory threshold under Section 4 of the IBC stood satisfied. They observed:

“…..the Respondent in reply to the petition has admitted its liability and stated that the financial difficulties arising out of industry specific slowdown and Covid-19 pandemic severely affected its ability to meet its financial obligations on time. Its business has come to a standstill. It has been taking steps to revive the business. Nevertheless, it commits to settle the petition at the earliest. This clearly amounts to acknowledgment of debt.”

Enmas India Pvt. Ltd. filed the petition in relation to an alleged default of Rs. 1.13 crore. The claim comprised Rs. 64.05 lakh towards unpaid invoices for materials supplied and Rs. 49.46 lakh towards advance payments made for goods that were not supplied.

The Corporate Debtor contended that advance payments could not be treated as operational debt and, at best, would fall within the category of financial debt. It further argued that such amounts could not be clubbed with invoice dues to meet the minimum threshold under Section 4 of the IBC.

Rejecting the contention of the Corporate Debtor, the Tribunal relied on the Supreme Court's decision in Consolidated Construction Consortium Ltd. v. Hitro Energy Solutions Pvt. Ltd., which clarified that advance payments made for goods or services qualify as operational debt when they are directly linked to the supply of goods or services.

The Bench also referred to Sanam Fashion & Design Exchange Ltd. v. Ktex Nonwovens Pvt. Ltd., wherein it was observed that the character of operational debt depends on its nexus with goods or services, irrespective of whether the claimant is a supplier or recipient.

The Tribunal further noted that the Corporate Debtor had acknowledged its liability through balance confirmation letters dated 01.04.2019 and 28.02.2022 and had admitted financial distress in its reply. It held that such admissions amounted to acknowledgment of debt under Section 18 of the Limitation Act, thereby extending limitation.

Accordingly, the NCLT admitted the petition, holding that the aggregate dues exceeded Rs. 1 crore, the statutory threshold under Section 4 of the IBC.

For Applicant: Shri. V.M. Kannan, Advocate; Ms. Harimohana, Advocate

For Respondent: Shri. Vikram P. Jain, Advocate