NCLAT: Advance Payment For Goods Not Supplied Constitutes Operational Debt Under Section 5(21) Of IBC
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT), New Delhi, has held that an amount paid as advance consideration constitutes an “Operational Debt” under Section 5(21) of the Insolvency and Bankruptcy Code, 2016 (IBC), especially when the said amount is reflected in the audited balance sheet of the corporate debtor as “advance from others” without any qualifying note by the auditor.
A Bench comprising Justice Yogesh Khanna (Judicial Member) and Mr. Indevar Pandey (Technical Member) held that “a purchaser who has made advance payments for supply of goods is an operational creditor, when such goods are not supplied. The debt arises in respect of the provision of goods or services, and failure to perform creates a right to payment.”
Background
The appeal arose from an order of the NCLT Ahmedabad Bench, which had admitted a petition under Section 9 of the IBC filed by Hiralal Bhimjibhai Kumavat, Proprietor of B.N. Enterprises (Operational Creditor), against Vasundhara Seamless Stainless Tubes Pvt. Ltd. (Corporate Debtor). The petition was based on a Sale Agreement dated 31 January 2019, executed for the purchase of machinery and scrap worth ₹1 crore. The operational creditor paid the entire consideration in three instalments — ₹20 lakhs by demand draft, and ₹40 lakhs each by cheques dated 12 and 24 February 2019. The creditor alleged that despite repeated requests, the corporate debtor neither permitted removal of the scrap nor refunded the advance. The Adjudicating Authority (NCLT) admitted the application, holding that the unpaid advance amount constituted an operational debt under Section 5(21) of the Code. Aggrieved, the suspended director of the corporate debtor, Rakesh Bhailalbhai Patel, filed the present appeal before the NCLAT.
Appellant’s Submissions
The appellant contended that the transaction was a one-time sale of scrap and machinery and did not fall within the definition of “operational debt.” It was argued that the contract imposed no obligation on the corporate debtor to refund any amount, and therefore, no legally enforceable debt existed. It was further submitted that the balance sheet entries showing ₹1 crore as “advance from others” were mere accounting disclosures made due to the operational creditor’s failure to provide GST details, not acknowledgments of liability. The appellant also claimed that the scrap was duly lifted by the operational creditor in 2019 and that the letters relied upon by the creditor were fabricated. It was further argued that a police complaint alleging forgery had been filed, and that the application was barred by limitation. According to the appellant, the NCLT erred in admitting the petition without considering these objections.
Respondent’s Submissions
On the other hand, the operational creditor asserted that several written requests were made to the corporate debtor on 1 May 2019, 12 November 2019, 6 June 2022, and 23 March 2023, seeking permission to lift the scrap or refund the money. These letters were duly acknowledged with the company’s official stamp, indicating continuous correspondence and acknowledgment of liability. It was further submitted that the corporate debtor’s audited balance sheets for FY 2020–21 and 2021–22 reflected ₹1 crore as “Advance from Others – B.N. Enterprises” without any qualifying note by the auditors. The respondent argued that if these were mere accounting entries for compliance purposes, they would have been accompanied by a qualifying note, which was absent. The respondent also pointed out that there was no pre-existing dispute, as the alleged police complaint was filed only after the case had been heard and reserved for orders. The corporate debtor’s consistent silence between 2019 and 2023, despite multiple communications, indicated absence of a genuine dispute.
Findings and Analysis
The NCLAT framed the key issue as whether the advance amount of ₹1 crore, paid under the sale agreement, constituted an operational debt and whether the corporate debtor’s failure to refund the money amounted to default. Relying on the Supreme Court’s decision in Consolidated Construction Consortium Ltd. v. Hitro Energy Solutions Pvt. Ltd. (2022) 7 SCC 164, the Tribunal observed that “a purchaser who has made advance payments for supply of goods is an operational creditor when such goods are not supplied.” The Bench reiterated that such advance payments fall within the ambit of operational debt under Section 5(21) as they arise “in respect of provision of goods or services.”
The Tribunal rejected the argument that absence of a refund clause absolved the debtor of liability, holding that Sections 65 and 70 of the Indian Contract Act, 1872 impose an implied obligation to return consideration if performance is not rendered. It emphasized that once the debtor received the money but failed to deliver the goods, the debt became legally recoverable. On examining the corporate debtor’s financial statements, the Bench noted that the balance sheets for successive years consistently reflected the amount as “advance from B.N. Enterprises” without any auditor’s qualification, establishing continued acknowledgment of liability. The absence of any explanatory note confirmed that the amount was treated as a subsisting debt.
The NCLAT further observed that the entries in the balance sheet constituted acknowledgment under Section 18 of the Limitation Act, extending limitation up to 31 March 2025. Since the Section 9 petition was filed on 23 June 2023, it was held to be within time. For this, the Bench relied on Asset Reconstruction Company (India) Ltd. v. Bishal Jaiswal (2021) 6 SCC 366 and Dena Bank v. C. Shivakumar Reddy (2021) 10 SCC 330, which recognized balance sheet acknowledgments as extending limitation for IBC proceedings.
On Pre-Existing Dispute
Applying the test laid down by the Supreme Court in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2018) 1 SCC 353, the Tribunal held that no credible pre-existing dispute existed. The so-called police complaint alleging forgery, filed on 20 July 2024, was considered a belated afterthought since it was lodged more than a year after the demand notice and after the case was reserved for judgment. The Bench remarked that “there is not a single piece of evidence on record to suggest that the Corporate Debtor raised any objection to the authenticity of the letters, denied the liability, or communicated any disagreement regarding the ₹1 crore transaction before that date.” The debtor’s prolonged silence, despite multiple reminders, and its failure to file a reply before the NCLT despite repeated opportunities, further showed absence of any genuine dispute.
Holding that the advance amount constituted an operational debt, the NCLAT affirmed that once the money was paid and not refunded, and there was no plausible evidence of discharge, default stood established. Finding no infirmity in the NCLT’s order, the Appellate Tribunal concluded that the existence of operational debt and default was duly proved, and that there was no bona fide pre-existing dispute. Accordingly, the appeal was dismissed, and the initiation of CIRP against Vasundhara Seamless Stainless Tubes Pvt. Ltd. was upheld.
Appearance
For Appellant: Mr. Abhijeet Sinha, Sr. Advocate, Mr. Malak Bhatt, Ms. Neeha Nagpal, Mr. Saikat Sarkar, Ms. Nitya Prabhakar, Advocates.
For Respondents: Mr. Navin Pahwa, Sr. Advocate, Mr. Himanshu Satija, Mr. Harsh Saxena, Ms. Ridhi Ranjan, Advocates.
Cause Title: Rakesh Bhailalbhai Patel Versus Vasundhara Seamless Stainless Tubes Private Limited
Case No: Company Appeal (AT) (Ins.) No. 1695 of 2024
Coram: Justice Yogesh Khanna (Judicial Member), Mr. Indevar Pandey (Technical Member)
