Substance Over Invoicing; NCLT Recognises Pre-10A Contractual Default Despite Later Documentation

Substance Over Invoicing; NCLT Recognises Pre-10A Contractual Default Despite Later Documentation

Introduction

The present interlocutory application was filed by Nivaya Resources Pvt. Ltd., the Operational Creditor, under Rule 11 of the National Company Law Tribunal Rules, 2016, seeking to place on record the correct date of default and additional documents in the pending insolvency proceedings against Sahaj Vishwas Urja Pvt. Ltd., the Corporate Debtor. The central controversy revolved around whether the default occurred prior to the embargo period under Section 10A of the Insolvency and Bankruptcy Code, 2016, and whether the omission of the date of default in the statutory demand notice could be cured at a later stage.

Factual Background

The Applicant and the Respondent entered into two contracts dated 22 October 2018 and 25 October 2018 for the supply of Steam (Non-Coking) Coal. Each contract provided for supply of coal through railway rakes, with payment terms clearly stipulating that payment was to be made within 30 days from the berthing of the vessel. The contracts categorically excluded any concept of credit sale and provided for interest at the rate of 12% per annum in the event of delayed payment.

The vessel carrying the coal was berthed on 06 March 2019, evidenced by the Railway Receipt dated the same day. As per contractual terms, the payment therefore became due on or before 05 April 2019. The Respondent failed to make payment within the stipulated period, leading to the occurrence of default on 05 April 2019.

Subsequently, correspondence between the parties reflected that the Respondent sought invoices and railway receipts, to which the Applicant clarified that payment was required to precede invoicing and that invoices were raised later purely for accounting, audit, interest, and delayed lifting charges. Four invoices dated 02 November 2020 were thereafter issued, long after the default had already occurred.

Procedural Background

The Applicant initiated proceedings under Section 9 of the IBC by issuing a demand notice dated 20 September 2022. However, the demand notice did not expressly mention the date of default. During the course of proceedings, the Tribunal granted liberty to the Applicant to specify the date of default. Pursuant to such liberty, the present interlocutory application was filed seeking to record the date of default as 05 April 2019 and to place additional supporting documents on record.

The Respondent opposed the application, contending that the Applicant was attempting to retrospectively alter the foundation of its claim to escape the bar under Section 10A of the IBC.

Issues

1. Whether the date of default can be specified or amended after completion of pleadings.

2. Whether non-mentioning of the date of default in the demand notice under Section 8 of the IBC invalidates the proceedings.

Contentions of the Parties

The Applicant contended that the default arose directly from the contractual payment terms and occurred on 05 April 2019, independent of the issuance of invoices. It was argued that invoices were not the source of liability but merely reflected quantification of amounts already due. The Applicant further submitted that the default was continuous and commenced prior to the Section 10A period, thereby excluding the applicability of the statutory bar. Reliance was placed on multiple decisions of the NCLAT and the Supreme Court affirming that defaults committed prior to the Section 10A period and continuing thereafter are not protected by the embargo.

The Respondent, on the other hand, argued that the demand notice and invoices formed the sole foundation of the claim and that all invoices were dated 02 November 2020, squarely falling within the Section 10A period. It was contended that the Applicant was impermissibly attempting to introduce a new date of default at a belated stage to cure a fatal defect. According to the Respondent, omission of the date of default in the demand notice rendered the proceedings non-maintainable and incapable of being cured under Rule 11.

Reasoning and Analysis

The bench of Shri Brajendra Mani Tripathi (Judicial Member) and Shri Man Mohan Gupta (Technical Member) examined the contractual clauses and found that payment was contractually due within 30 days of berthing of the vessel, with no dependency on issuance of invoices. The berthing had occurred on 06 March 2019, the payment became due on 05 April 2019, and failure to pay constituted default on that date.

It was observed that invoices are not contracts and cannot override express contractual terms. The Tribunal noted that the invoices issued in November 2020 were subsequent to the default and were raised for accounting and ancillary purposes, and therefore did not determine the date of default or create a fresh cause of action.

On the applicability of Section 10A, the Tribunal held that the statutory bar applies only to defaults committed during the prohibited period. Since the default in the present case had occurred prior to 25 March 2020 and continued thereafter, the protection under Section 10A was unavailable to the Respondent.

With respect to the omission of the date of default in the demand notice, the Tribunal held that such omission would be fatal only if it caused prejudice to the Corporate Debtor. Given the admitted existence of contracts, supply of goods, and non-payment, no prejudice was demonstrated. The Tribunal relied upon established precedent that procedural defects which do not cause substantive injustice cannot defeat legitimate claims.

The Tribunal further held that amendments to pleadings and filing of additional documents are permissible under the IBC framework, particularly where such amendments aid effective adjudication and do not fundamentally alter the nature of the claim.

Decision

The Tribunal allowed the interlocutory application and held that the date of default occurred on 05 April 2019. The additional documents were taken on record. The Applicant was directed to file a formal amendment application incorporating the date of default in the main petition. The application under Rule 11 was accordingly allowed and disposed of.

In this case the appellant was represented by Ms.Virender Ganda, Sr. Adv a.w Mr. Rahul Kakkar, a.w. Mr. Arush, Advocate. Meanwhile the respondent was represented by Mr. Rajat Lohia, Advocate.