Set Off / Counter Claim Can Be Allowed At CIRP Admission Stage U/S 9 Of IBC: NCLAT New Delhi

Brief Facts

Chemicals to the tune of Rs. 1,82,54,891 were supplied by Khushbu Dye Chem Pvt. Ltd.(operational creditor/appellant) against which seven invoices were raised for which the payment had to be made within 60 days. However, no payment was made even after multiple reminders. Thereafter, a demand notice was issued to Chemical Suppliers India Pvt. Ltd.(corporate debtor/respondents) on June 26, 2022 in which the aforesaid amount was claimed. The amount was admitted by the corporate debtor but it denied to make payment on the ground that the same was adjusted in the amount arising from a different transaction thereby creating a bogus dispute to get rid of the IBC. Subsequently, six cheques were issued by the corporate debtor to discharge its liability to the tune of Rs. 2,43,86,959. When these cheques were presented for encashment, they were returned unpaid with remark payment stopped by the borrower. In pursuance of this, a false case of forgery against the operational creditor was filed by the corporate debtor.

The operational creditor filed a petition under section 9 of the IBC seeking to initiate CIRP against the corporate debtor. The petition was dismissed by the Adjudicating Authority on the ground that the claimed amount did not cross the threshold limit under section 4 of the IBC and there was already a pre-existing dispute with respect to the debt amount of Rs. 1,82,54,891 along with interest of Rs. 42,72,193.

Contentions

The appellant contended that operational debt is valid and crosses the threshold limit under section 4 of the IBC. It was further argued that admitted liability of outstanding dues cannot be done away with under the IBC through adjustments, set off and issuance of credit notes therefore plea of adjustment of the respondent is liable to be rejected.

Per contra, the respondent contended that the appellant did not disclose the long pending disputes between the parties in the petition. It was further submitted that the claimed amount was adjusted against an obligation related to a transaction involving 450 MT of IPA. The appellant took delivery only of 143.850 MT and paid Rs. 2,36,79,147. Remaining balance for the supply of materials was not paid therefore it is a fit case to adjust the remaining amount in set off with the claimed debt amount. It was submitted that when the claimed amount is set off against the remaining amount, left out amount does not cross the threshold limit therefore the petition is liable to be rejected on this ground. It was further argued that issued cheques were tampered with for which a criminal complaint was instituted for forgery. It was further contended that interest claimed by the appellant does not qualify as operational debt under the IBC. it was further submitted that unsolved issues and not taking delivery of materials indicate the existence of a pre-existing dispute between the parties which bar the petition under section 9 of the IBC from being admitted.

NCLAT Analysis

The NCLAT agreed with the contention of the respondent and observed that interest claimed by the appellant in the petition could not be classified as operational debt within the provisions of the IBC. Section 5(21) of the IBC was referred which defines operational debt in which no interest is included whereas under section 5(8) which defines financial debt, interest is included. The tribunal came to the conclusion that interest under section 5(21) of the IBC does not constitute an operational debt. The tribunal further noted that when interest is excluded from the claimed amount, it does not cross the threshold limit under section 4 of the IBC. The tribunal referred to the NCLAT judgment in SS Polymers Vs. Kanodia Technoplast Ltd.(2019) cross referenced in Steel India Vs. Theme Developers Pvt.(2020) Ltd wherein it was held that interest claimed in the petition without mutual consent of both parties could not be considered for determining threshold limit under the IBC.

The Tribunal further noted that there existed pre-existing disputes related to dishonoured cheques, supply of IPA and mutual allegations in the police complaints which are sufficient to dismiss the petition under section 9 of the IBC as the tribunal is not mandated to check the veracity of the dispute being raised between the parties at this stage.

The Tribunal further rejected the arguments of the appellant with respect to set off. The tribunal distinguished the Supreme Court judgment in Bharti Airtel Ltd. & Anr. Vs. Vijaykumar V. Iyer & Ors. 2024 LiveLaw (SC) 11. from the facts of the present case wherein it was held that set off under Order 8 Rule 6 or set off permitted by regulation 29 of the liquidation regulations cannot be permitted in the CIRP. The tribunal further noted that in the present case the CIRP has not begun yet and set off that is being claimed by the respondent is with respect to the business transactions happened between the parties before the filing of the present petition. Additionally, the set off was in the form of mere adjustment of entries and not exchange of money.

Conclusion

The NCLAT concluded that the appeal under section 9 of the IBC is liable to be rejected due to existence of a pre-existing dispute and not meeting the threshold limit under section 4 of the IBC. Accordingly, the present appeal was dismissed.

Case Title: Khushbu Dye Chem Pvt. Ltd. v. Chemical Suppliers India Pvt. Ltd.

Court: National Company Law Appellate Tribunal, New Delhi

Case Reference: Company Appeal (AT) (Insolvency) No. 664 of 2024

Judgment Date: 06/08/2024

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