NCLAT Holds Advance Payment for Goods as Operational Debt When Shown in Balance Sheet Without Auditor’s Note
NCLAT Holds Advance Payment for Goods as Operational Debt When Shown in Balance Sheet Without Auditor’s Note
Introduction
The National Company Law Appellate Tribunal (NCLAT), New Delhi, held that an amount paid as advance consideration for goods constitutes an operational debt under Section 5(21) of the Insolvency and Bankruptcy Code, 2016 (IBC), when it is reflected in the corporate debtor’s audited balance sheet without any qualifying note from the auditor. The Tribunal ruled that failure to deliver goods against such advance creates a right to payment and, therefore, qualifies as an operational debt.
Factual Background
The dispute arose from a sale agreement between the operational creditor, Hiralal Bhimjibhai Kumavat, and the corporate debtor, Vasundhara Seamless Stainless Tubes Pvt. Ltd., for the purchase of scrap and machinery worth ₹1 crore. The operational creditor paid the entire amount in three tranches, but the corporate debtor neither permitted removal of the scrap nor refunded the advance. The amount was reflected in the corporate debtor’s audited balance sheet for FY 2020–21 and 2021–22 as “Advance from Others – B.N. Enterprises” without any qualifying remarks by the auditors.
Procedural Background
The operational creditor filed a petition under Section 9 of the IBC before the NCLT Ahmedabad Bench seeking initiation of CIRP against the corporate debtor. The NCLT admitted the petition, holding that the unpaid advance amount constituted an operational debt. Aggrieved, the corporate debtor filed the present appeal before the NCLAT, challenging the admission order.
Issues
1. Whether an advance payment for purchase of goods can be treated as an operational debt under Section 5(21) of the IBC.
2. Whether the absence of a refund clause in the sale agreement negates the existence of a legally enforceable debt.
Contentions of the Parties
Appellant: The appellant contended that the transaction was a one-time sale of scrap and machinery, not an operational transaction falling within the ambit of Section 5(21) of the IBC. It was further argued that the scrap had already been lifted in 2019, and since the sale agreement did not contain any clause for refund, no legally enforceable debt existed. The appellant also relied on a police complaint of forgery filed later, alleging dispute over the transaction.
Respondent: The respondent submitted that several letters and reminders seeking delivery of goods were duly acknowledged by the company, evidencing continuing acknowledgment of liability. The advance amount of ₹1 crore was recorded in the corporate debtor’s audited balance sheets without any auditor’s qualification, thereby confirming subsisting liability. It was also argued that the alleged police complaint was a belated afterthought, filed long after the demand notice and hearing before the NCLT, and hence did not constitute a pre-existing dispute.
Reasoning and Analysis
The bench comprising Justice Yogesh Khanna (Judicial Member) and Mr. Indevar Pandey (Technical Member) observed that the operational creditor’s claim for refund of the advance directly flowed from the corporate debtor’s failure to deliver goods, thus satisfying the definition of operational debt under Section 5(21) of the IBC. The Bench noted that the audited balance sheets for FY 2020–21 and 2021–22 clearly reflected the amount as “Advance from Others – B.N. Enterprises” without any qualifying remark. The absence of any auditor’s note indicated that the liability was accepted as genuine. Referring to Bishal Jaiswal v. Asset Reconstruction Company (India) Ltd., the Tribunal held that such entries constitute an acknowledgment of debt under Section 18 of the Limitation Act. The Tribunal rejected the argument of a pre-existing dispute, applying the Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. test. It held that the alleged police complaint filed in 2024, five years after the transaction and after issuance of the demand notice, was an afterthought to create a façade of dispute.
Implications
This judgment reinforces the principle that advance payments for goods, if unpaid and duly reflected in financial statements, can constitute operational debts under the IBC. It further clarifies that entries in audited balance sheets can serve as valid acknowledgment of debt under the Limitation Act, and afterthought disputes cannot shield a corporate debtor from insolvency proceedings.
Order
The NCLAT dismissed the appeal, upholding the NCLT Ahmedabad’s order admitting the Section 9 application. The Tribunal concluded that once the advance payment was made, not refunded, and acknowledged in the balance sheet, default stood established.
In this case the appellant was represented by Mr. Abhijeet Sinha, Sr. Advocate, Mr. Malak Bhatt, Ms. Neeha Nagpal, Mr. Saikat Sarkar and Ms. Nitya Prabhakar, Advocates. Meanwhile the respondent was represented by Mr. Navin Pahwa, Sr. Advocate, Mr. Himanshu Satija, Mr. Harsh Saxena and Ms. Ridhi Ranjan, Advocates.
