Pre-Section 10A Default Is Not Extended By Acknowledgment When Partial Payment Is Made For Acknowledged Debt: NCLAT

Brief Facts:

M/s Servomax Limited (Corporate Debtor) had issued various purchase orders to TVN Enterprises (Operational Creditor) for the supply of goods including copper conductors and core assembly units till 15.09.2020. The Operational Creditor had also made the supply of goods as per the purchase orders issued by the Corporate Debtor and had raised invoices for such supply.

The Operational Creditor issued a demand notice dated 28.09.2022 to the Corporate Debtor under Section 8 of the Insolvency and Bankruptcy Code, 2016 (Code). Subsequently, the 1st Respondent filed the Application under Section 9 of the Code before the National Company Law Tribunal (NCLT) seeking initiation of Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor. The NCLT by its order dated 22.02.2024 had allowed the said Application and ordered initiation of CIRP against the Corporate Debtor.

Contentions:

The Appellant submitted that the order of the NCLT is erroneous because the debt due will not cross the threshold of Rs. 1 crore, once the invoices falling due for payment are for the period between 25.03.2020 to 25.03.2021, which should have been excluded from the total debt due on account of the stipulation of Section 10 A of the Code.

It was also argued that the alleged acknowledgment of debt on 05.01.2022 cannot give a fresh cause of action to shift the date of default by the Corporate Debtor for the purpose of initiating Section 9 proceedings as held by the NCLAT in SLB Welfare Association V. PSA Impex Private Limited (2023).

Per contra, the Respondents submitted that as the date of default is 14.03.2020, his Section 9 application is not covered by the provisions of Section 10 A of the Code, 2016.

It was also argued that the default started on 14.03.2020, and it had continued through the Section 10A period, and continued even thereafter as evidenced by the acknowledgments given by the Corporate Debtor therefore the case is fully covered by the NCLAT judgment in Narayan Mangal V. Vatsalya Builders, Raghavendra Joshi V. Axis Bank, Beetel Teletech V. Arcelia IT Services.

Observations:

The Tribunal noted that the Appellant has failed to show any complaint that has been raised by him with respect to quality of goods as per the general practice in the business therefore the plea of pre-existing dispute for the purpose of rejecting the application under section 9 of the code cannot be accepted.

Section 10A of the code states that for any default arising on or after 25.03.2020 till 25.03.2021, no application shall ever be filed for initiation of CIRP for the said default arising during the said period.

The Tribunal noted that out of these 28 invoices, 27 invoices fell due for payment and were defaulted on, in the period 25.03.2020 to 25.03.2021, that is Section 10 A period, if we add 30 days to the date of raising of each invoice. Thus, clearly the debt due on these 27 invoices will attract the provision of Section 10 A of the Code.

The Tribunal distinguished the case of Vishal Agarwal v. ICICI Prudential Real Estate AIR-I & Anr (2022) from the facts of the present case as in the present case there was a clear default during the prohibited period under section 10A of the code.

Based on the above, it said that if if 27 invoices that fell due during the prohibited period are excluded from the total debt, the debt for which the application under section 9 of the code is said to have been filed will fall below the threshold limit of 1 crore as provided under section 4 of the code.

The Tribunal noted that the amount that is due for pre 10A period is very below threshold limit even if the corporate debtor has acknowledged the debt accumulating between 25.3.2020 and 16.9.2020, it cannot be said to be the continuation of the default to have been committed on 14.3.2020 as some amount out of the total acknowledged amount has already been paid therefore 27 invoices that fell due during the period under section 10A of the code, they cannot be included in the total debt for initiating CIRP.

The Tribunal concluded that the Respondent will continue to have the right to recover the said dues by all the means available to him including approaching commercial courts except resorting to proceedings under the Code as the debt is not extinguished.

Case Title: Mr. Sudhir Bobba V M/s. TVN Enterprises and Anr.

Case Number: Company Appeal (AT) (CH) (Ins) No.95/2024 (IA Nos.262, 263 & 264/2024)

Judgment Date: 14/02/2025

For Appellant : Mr. R Venkatavaradan, Advocate For Mr. Saai Sudharsan, Advocate

For Respondents : Ms. Himangini Sanghi, Advocate, For R1

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