Rakesh Bhailalbhai Patel vs Vasundhara Seamless Stainless ...

(Arising against the impugned order dated 22.08.2024 passed by the Hon'ble National Company Law Tribunal, Ahmedabad Bench in C.P. (IB)/198/AHM/2023)

IN THE MATTER OF:

Rakesh Bhailalbhai Patel (Suspended Director of Vasundhara Seamless Stainless Tubes Private Limited) Registered Office at 9-B, 9th Floor, ...Appellant B.D. Patel House, Naranpura Road, Ahmedabad - 380009, Gujarat.

Versus

Vasundhara Seamless Stainless Tubes Private Limited, (Through its Interim Resolution Professional, Mr. Sachin Naveen Sinha) Registered Office at 9-B, 9th Floor, B.D. Patel House, Naranpura Road, ...Respondent No.1

Ahmedabad - 380009, Gujarat

Hiralal Bhimjibhai Kumavat, Proprietor of B. N. Enterprises, Add: 1/ 132, Sarvodaynagar, Bhuyangdev Cross Roads, ...Respondent No.2 Ahmedabad-380061.

Present:

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.

Cont'd..../ -2-

J U D G M EN T (17th October, 2025)

INDEVAR PANDEY, MEMBER (T)

This appeal has arisen from the order dated 22.08.2024 passed by the

National Company Law Tribunal, (Adjudicating Authority) Ahmedabad Bench

in C.P. (IB)/198/AHM/2023. The Adjudicating Authority admitted the

petition filed under Section 9 of the Insolvency and Bankruptcy Code, 2016

(hereinafter referred to as Code) filed by Mr. Hiralal Bhimjibhai Kumavat, the

proprietor of B.N. Enterprises (Operational Creditor) and Respondent No. 2

herein. The Adjudicating Authority vide the impugned order directed the

initiation of the Corporate Insolvency Resolution Process (CIRP) against

Vasundhara Seamless Stainless Tubes Private Limited, the Corporate Debtor

(CD).

2. The Appellant Sh. Rakesh Bhailabhai Patel, the suspended director of

the Corporate Debtor, has preferred this appeal challenging the admission

order on the grounds that the petition was entertained despite serious

disputes as to the debt, fabrication of documents, inconsistency in the alleged

dates of default, and non-fulfilment of statutory prerequisites under the Code.

The Corporate Debtor represented through its Interim Resolution Professional

Sh. Sachin Naveen Sinha is the Respondent No.1 herein.

3. The brief facts of the case are as given below:

i. The Corporate Debtor, Vasundhara Seamless Stainless Tubes Private

Limited, which had been incorporated in the year 2014, was engaged in

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the business of manufacturing structural metal products, tanks,

reservoirs and steam generators.

ii. The CD came under a new management w.e.f 25.06.2021. The

appellant was appointed as a Director of the CD w.e.f 05.05.2023.

iii. Prior to the appointment of Appellant in CD, under the old

management, a Sale Agreement was executed on 31.01.2019 between

Corporate Debtor and Respondent No. 2 for the sale of machineries and

scrap for a total consideration fixed at Rs.1 Crore. The machineries and

scrap were lying in the premises of the 'Choksi Tubes Company', which

was also owned by the CD and was situated on the Kalol Rancharda

Highway at Moti Bhoyan village, Distt. Gandhinagar, Gujarat.

iv. Pursuant to the terms of this Sale agreement, Respondent No. 2

advanced the entire sum of Rs.1 Crore within the period between

29.01.2019 and 27.02.2019, by way of one demand draft of ₹20 lakhs,

a cheque of ₹40 lakhs encashed on 14.02.2019, and another cheque of

₹40 lakhs encashed on 27.02.2019.

v. The agreement specifically obligated Respondent No. 2 to lift the scrap

within a period of thirty days from the date of execution (31.01.2019),

which meant the last date of lifting the scrap was 01.03.2019. The

Appellant's case is that the scrap was duly lifted in several tranches

during February itself, thereby bringing the contract to a conclusion.

vi. Contrary to this position, Respondent No. 2 alleged that the Corporate

Debtor did not permit removal of the scrap and claimed to have issued

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letters on 01.05.2019, 12.11.2019, 06.06.2022, and 23.03.2023,

demanding either permission to lift the material or a refund of the

advance. The Appellant claims that these letters were never received,

are fabricated in nature, and were allegedly acknowledged by a fictitious

person named "Darshan Palan," who had no connection with the

Corporate Debtor.

vii. The original signatory of the agreement, Late Shri Akshay Bhatt, who

represented the Corporate Debtor, passed away on 13.12.2019, and

thereafter, on 25.06.2021, a new Board of Directors assumed control of

the company, followed by a change in the registered office address on

01.09.2021 from Narayan Complex, Navrangpura, Ahmedabad, to B.D.

Patel House, Naranpura Road, Ahmedabad.

viii. Respondent No. 2 issued a demand notice under Section 8 of the Code

on 01.05.2023 (dispatched on 03.05.2023) to the CD. The CD did not

reply to the notice u/s 8 of the Code. On 23.06.2023, Respondent No.

2 filed a petition under Section 9 of the Code, before the NCLT,

Ahmedabad, being C.P. (IB)/198/AHM/2023, claiming refund of the

said amount of Rs.1 Crore.

ix. During the proceedings CD sought time to file its reply, however, the

same was not filed despite several opportunities being given to them.

On 23.04.2024, the Adjudicating Authority proceeded ex parte and

closed its right to file a reply. Subsequently, Respondent No. 1 moved

an interlocutory application (I.A. No. 1708 of 2024) on 04.07.2024

Company Appeal (AT) (Ins.) No. 1695 of 2024 -5-

seeking recall of the ex parte order and an opportunity to file a detailed

reply.

x. The Adjudicating Authority, after heard the final arguments from both

sides on 02.08.2024, and after obtaining the written submissions from

both the parties, passed the order dated 22.08.2024 admitting the

Section 9 petition, thereby initiating CIRP against the Corporate Debtor.

The present appeal arises from the aforesaid order.

Submission of the appellant

4. In his opening remark Ld. Counsel for the Appellant stated that the

present Appeal arises out of the impugned order dated 22.08.2024 passed by

the Learned National Company Law Tribunal, Ahmedabad Bench ("Ld. NCLT")

in CP(IB)/198/AHM/2023, whereby the application under Section 9 of the

Code filed by Respondent No. 2 - Hiralal Bhimjibhai Kumavat, Proprietor of

B.N. Enterprises ("Operational Creditor") was admitted against the Corporate

Debtor.

5. Ld. Counsel submits that the impugned order is unsustainable for three

primary reasons: (i) there exists no "operational debt" within the meaning of

Section 5(21) of the IBC; (ii) there is no default in law or in fact, as alleged by

the Operational Creditor; and (iii) the impugned order is a wholly unreasoned

and non-speaking order, passed without considering or dealing with any of

the detailed objections raised by the Corporate Debtor, despite the reply being

formally taken on record by a separate order passed on the same day.

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6. Counsel for the Appellant submits that the debt claimed by Respondent

No. 2 originates from a Sale Agreement dated 31.01.2019. The said agreement

is purely a commercial contract concerning the sale of machinery and scrap,

and does not fall within the ambit of "operational debt" as defined under

Section 5(21) of the IBC. Under the agreement, Respondent No. 2 was to lift

scrap material lying in the premises of the "Choksi Tubes Company" against

a sale consideration of Rs. 1 Crore.

7. Pursuant to this arrangement, Respondent No. 2 made advance

payments as follows:

 Rs. 20 lakhs by DD No. 695 dated 29.01.2019;

 Rs. 40 lakhs by Cheque No. 002104 dated 12.02.2019, duly encashed

on 14.02.2019;

 Rs. 40 lakhs by Cheque No. 002105 dated 24.02.2019, duly encashed

on 27.02.2019.

8. As per Clause 1 of the Agreement, it was the clear obligation of

Respondent No. 2 to lift the scrap within 30 days, i.e., by 02.03.2019. Under

Clauses 3 and 4, the Corporate Debtor was under no obligation to grant

permission or facilitate lifting except to intimate the local police authorities.

Thus, the entire case of the Operational Creditor that it could not lift the scrap

due to non-cooperation stands falsified, especially since the scrap was, in fact,

lifted and all payments were duly honoured.

9. Furthermore, the counsel submitted that the agreement nowhere

contains a clause mandating refund of advance amounts. In absence of such

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a stipulation, no enforceable liability arises and therefore no operational debt

can be said to exist.

10. Ld. Counsel further points out that entries in the Corporate Debtor's

balance sheet merely reflect accounting disclosures necessitated by the

Respondent's failure to provide GSTIN details as required under Clause 5 of

the Agreement. Since no GST details were shared, invoices could not be

issued, and the advance amount was carried forward only for compliance

purposes. Such accounting entries cannot be treated as acknowledgment of

debt. The Supreme Court has consistently held that balance sheet entries,

unless accompanied by unequivocal intent to admit liability, cannot

constitute acknowledgment under Section 18 of the Limitation Act. In this

regard he invited our attention to the following Judgments of Hon'ble Supreme

Court: 'Asset Reconstruction Co. v. Bishal Jaiswal (2021) 6 SCC 366; SBI v.

Krishidhan Seeds (P) Ltd. (2023) 1 SCC 209'; 'S. Natarajan v. Sama Dharman

(2021) 6 SCC 413'; 'Khan Bahadur Shapoor Fredoom Mazda v. Durga Prasad

Chamaria (1962) 1 SCR 140'.

11. Without prejudice, Ld. counsel submits that even if arguendo any

operational debt were assumed, the element of default under Section 3(12) of

the IBC is absent. Respondent No. 2 was obligated to lift the scrap within the

contractual period, but raised no contemporaneous grievance or complaint

regarding non-cooperation.

12. Ld. Counsel submitted that the letters relied upon by the Respondent

dated 01.05.2019, 12.11.2019, 06.06.2022, and 23.03.2023 are fabricated

documents. They are not addressed to the authorized representative

Company Appeal (AT) (Ins.) No. 1695 of 2024 -8-

mentioned in the Agreement, but rather to one Mr. Darshan Palan, who was

neither an employee nor an authorized signatory of the Corporate Debtor.

These letters, spanning four years and delivered to unrelated addresses, lack

authenticity and were created post expiry of the contract and after a complete

change in management. Significantly, during the management of Mr. Akshay

Bhatt, who oversaw these transactions, no disputes were ever raised.

13. Ld. Counsel emphasized that the Sale Agreement imposed no positive

obligation on the Corporate Debtor to deliver or arrange removal of scrap. Its

sole obligation was to intimate the police authorities, which was duly complied

with. Hence, no "default" can be attributed.

14. It is the submission of Appellant that if the Corporate Debtor had

genuinely failed in its obligations, no prudent creditor would have continued

issuing and encashing cheques, as Respondent No. 2 did. Such conduct

negates the allegation of default.

15. Counsel further submits that the Section 9 application is vitiated by

mala fides and unclean hands, as it relies upon fabricated documents. The

allegedly concocted letters, falsely attributed to the Appellant, were created

solely to extend limitation and fabricate default. The Appellant has already

filed a police complaint against Respondent No. 2 in this respect, and in

proceedings under RTI, Respondent No. 2 himself admitted before police

authorities that the entire scrap material had been duly received.

16. Ld. Counsel further submitted that despite a specific order of the Ld.

NCLT dated 29.01.2024, Respondent No. 2 failed to furnish a certificate of

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default from NeSL. On the NeSL portal itself, the debt stands marked as

"Disputed." The dates of default stated in the Demand Notice and the Section

9 application are contradictory, and such inconsistencies strike at the root of

maintainability. It is a settled principle that one debt cannot have two

separate default dates.

17. Ld. Counsel also points out that the alleged date of default falls beyond

the limitation period of three years. There is no acknowledgment under

Section 18 of the Limitation Act to save limitation. Thus, the application is

nothing more than a debt recovery exercise camouflaged under the guise of

insolvency proceedings, which is impermissible under the scheme of the IBC.

18. Ld. Counsel finally submits that the impugned order is liable to be set

aside as it is a non-speaking order. The Ld. NCLT, while admitting the Section

9 petition, simultaneously allowed IA No. 1078/2024 and took the Corporate

Debtor's reply on record. Despite this, the impugned order does not deal with

a single submission, document, or objection raised by the Appellant.

19. The order summarily dismisses the Appellant's defence as irrelevant

without assigning any reasons. Such adjudication violates the settled

principles of natural justice. It is trite law that admission under Section 9 is

not a mere procedural exercise; the Adjudicating Authority is required to

determine whether an operational debt exists, whether it is undisputed, and

whether a default has occurred. By failing to examine these core elements,

the Ld. NCLT abdicated its statutory function.

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20. The impugned order, thus being mechanical, unreasoned, and non-

speaking, stands vitiated in law and is unsustainable.

21. In light of the above submissions, counsel for the Appellant respectfully

prays that this Hon'ble Tribunal may be pleased to Allow the present appeal

and set aside the impugned order dated 22.08.2024 passed by the NCLT

Ahmedabad Bench in CP(IB)/198/AHM/2023.

Submission of the Respondent No.2/ Operational Creditor

22. The learned counsel submits that the Corporate Debtor entered into a

Slump Sale Agreement dated 31.01.2019 with the Operational Creditor for the

sale of machineries and scrap lying in the factory premises of Choksi Tubes

Company for a total sale consideration of Rs. 1 Crore. The said agreement

clearly outlines the obligations of both parties under Clauses 1-3, 5, and

Clause 8, which stipulates the date of enforcement and performance of the

agreement.

23. Ld. Counsel stated that pursuant to the said agreement, Respondent

No. 2 made advance payments aggregating to Rs. 1 Crore in the following

manner--Rs. 20,00,000/- by Demand Draft No. 695 dated 29.01.2019, Rs.

40,00,000/- by Cheque dated 12.02.2019, and another Rs. 40,00,000/-

through cheque subsequently.

24. He further submits that the Operational Creditor issued various letters

to the Corporate Debtor seeking permission to lift the scrap material and

machinery from the premises. The said letters, duly stamped and

acknowledged by the Corporate Debtor, have been placed on record. However,

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despite repeated written requests, the Corporate Debtor failed to either permit

the lifting of material or refund the advance amount, thereby committing a

default.

25. The counsel further submits that the following material facts stand

undisputed:

a) the execution of the Agreement dated 31.01.2019;

b) the receipt of advance payments aggregating to Rs. 1 Crore; and

c) the fact that the scrap and machineries were never permitted to be lifted

by the Respondent No. 2. The Appellant himself admitted during the

hearing that the goods were not collected by the Respondent.

26. The counsel submits that the Operational Creditor squarely qualifies as

a creditor within the meaning of Section 3(10) of the Code, as the debt arises

from a lawful commercial transaction, giving rise to a "right to payment" under

Section 3(6) of the Code due to breach of contractual obligations.

27. He further submitted that the claim of the Operational Creditor arises

from supply of goods and services in connection with the sale of scrap and

machinery and therefore constitutes an "operational debt" under Section 5(21)

of the Code. The present claim is thus fully maintainable under Section 9 of

the Code.

28. The learned counsel places reliance on the judgment of the Hon'ble

Supreme Court in Consolidated Construction Consortium Ltd. v. Hitro Energy

Solutions Pvt. Ltd., (2022) 7 SCC 164, wherein it was categorically held that

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even a purchaser/procurer who makes advance payment for goods or services

to the Corporate Debtor would qualify as an Operational Creditor. Hence, the

Respondent's status as an Operational Creditor stands firmly established.

29. He further submitted that despite repeated requests, the Corporate

Debtor did not permit the Operational Creditor to collect the machinery and

scrap as per the terms of the Agreement. The letters evidencing these requests

bear the acknowledgment and stamp of the Corporate Debtor.

30. Ld. Counsel stated that, since the Corporate Debtor remained

unresponsive, the Operational Creditor, constrained by such inaction, issued

a Demand Notice dated 01.05.2023 in terms of Section 8 of the Code. The said

demand notice has been placed on record.

31. The counsel for the Respondent No.2 submits that the Corporate Debtor

has, in its own Audited Balance Sheet as on 31.03.2022 explicitly

acknowledged the name of B.N. Enterprises, a proprietorship of the

Operational Creditor, under the head "Advance from Others", thereby

admitting its liability of Rs. 1 Crore.

32. The Counsel submits that the Audit Reports for Financial Years 2020-

21 and 2021-22 reflect the same outstanding amount, thereby evidencing

continuity of acknowledgment of debt. The Corporate Debtor's plea that such

entries were mere accounting adjustments due to GST issues is baseless and

afterthought, as any genuine dispute in accounting requires a qualifying note,

which is absent in this case.

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33. Accordingly, in view of Ld. Counsel for Respondent No.2 there exists a

clear, unequivocal, and continuing admission of liability amounting to Rs. 1

Crore, thereby satisfying the minimum threshold under Section 4 of the Code.

34. The Ld. counsel stated that the Appellant has failed to produce any

documentary evidence suggesting the existence of a genuine dispute prior to

the issuance of the demand notice.

35. Ld. Counsel submits that no reply or notice of dispute was filed in

response to the demand notice dated 01.05.2023. Further, the Appellant

repeatedly defaulted in filing its reply to the Section 9 petition despite being

granted five opportunities by the Adjudicating Authority on 30.08.2023,

06.10.2023, 21.11.2023, 29.01.2024, and 11.03.2024.

36. The Respondent submitted that only after the NCLT, vide its order dated

23.04.2024, closed the Corporate Debtor's right to file a reply, did the

Corporate Debtor attempt to file one belatedly on 01.08.2024, which was

taken on record merely for completeness. These facts demonstrate that there

was no pre-existing dispute between the parties.

37. The counsel submits that the Appellant's reliance on a police complaint

dated 20.07.2024 is wholly misplaced and fabricated. The said complaint,

alleging forgery of certain correspondence dated 01.05.2019, 12.11.2019,

06.06.2022, and 23.03.2023, was lodged long after the demand notice and

even after the Section 9 petition was heard and reserved for orders.

38. He states that the timing of the complaint itself exposes its mala fide

intent as it was filed over a year after the last letter of the Operational Creditor

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and more than a year after the demand notice, merely to create an illusion of

dispute. Such afterthought actions cannot invalidate the Section 9

proceedings.

39. He submitted that it is settled law that disputes raised after issuance

of the demand notice cannot be termed pre-existing. Moreover, a mere

marking of a debt as "disputed" in the NESL record does not suffice to

establish the existence of a bona fide dispute under the IBC, unless supported

by documentary proof predating the demand notice.

40. The counsel submits that proceedings under Section 9 of the Code are

inherently summary in nature. The Adjudicating Authority is not expected to

conduct a detailed trial or evaluate evidentiary aspects beyond determining

whether (i) an operational debt exists, (ii) a default has occurred, and (iii) there

is no pre-existing dispute.

41. This position has been consistently upheld by this Hon'ble Tribunal,

including in 'Indo Alusys Industries Ltd. v. SMW Steel Pvt. Ltd. [Company

Appeal (AT) (Ins.) No. 409 of 2019]', where it was held that proceedings under

Section 9 of the Code are summary in nature and do not permit detailed

adjudication of complex factual controversies.

42. The counsel further submits that the Hon'ble NCLT has rightly held

that the cause of action in the present case is continuous. The Slump Sale

Agreement dated 31.01.2019 was followed by successive letters and

acknowledgments by the Corporate Debtor, including its audited accounts till

FY 2021-22, thereby extending limitation.

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43. He stated that the payments were made on 29.01.2019 and 12.02.2019,

and repeated letters dated 01.05.2019, 12.11.2019, 06.06.2022, and

23.03.2023 were issued by the Operational Creditor seeking performance of

the agreement. The demand notice was served on 01.05.2023, followed by

filing of the Section 9 petition on 23.06.2023, well within limitation.

44. The counsel further invited our attention to the Hon'ble Supreme

Court's order in In Re: Suo Motu Writ Petition (C) No. 3 of 2020, dated

10.01.2022, excluding the period between 15.03.2020 and 22.02.2022 from

computation of limitation, further validates that the petition is well within

prescribed time limits.

45. In light of the above, the counsel submits that the NCLT, Ahmedabad,

has rightly admitted the Section 9 application since all the statutory

preconditions under the Code stand fully satisfied, namely:

i. Existence of operational debt and default;

ii. Clear admission of liability by the Corporate Debtor; and

iii. Absence of any pre-existing dispute.

46. He therefore submitted that the appeal filed by the Appellant deserves

to be dismissed with costs, and the admission order passed by the

Adjudicating Authority ought to be upheld in the interest of justice.

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Analysis and findings

47. We have gone through the records of the case including the written

submissions of the parties, and have heard both parties at length. The

contesting respondent in this matter is the Operational Creditor/ Respondent

No.2. The CD represented by Interim Resolution Professional/ Respondent

No.1 is only a proforma respondent.

48. The key issue in this appeal revolves around the nature of the

transaction between the Corporate Debtor and the Operational Creditor

arising out of the Sale Agreement dated 31.01.2019. The question before this

Tribunal is whether the amount of ₹1 crore, admittedly paid by the

Operational Creditor to the Corporate Debtor, constitutes a legally recoverable

operational debt, and whether the Corporate Debtor's failure to deliver the

contracted goods or refund the amount amounts to a default as contemplated

under Section 3(12) of the IBC. The Appellant (suspended director) contends

that no operational debt exists, as the transaction was fully concluded in 2019

and the scrap was lifted by the Operational Creditor. The

Respondent/Operational Creditor on the other hand, asserts that despite

advance payment, the Corporate Debtor failed to permit lifting of the scrap or

refund the consideration, thereby committing default.

49. The Appellant argues that the Section 9 application was wrongly

admitted since the debt claimed by Respondent No. 2 does not qualify as an

"operational debt". It is his submission that the Agreement dated 31.01.2019

was merely a one-time sale contract for scrap and machinery. Under Clause

1 of the Agreement, the Operational Creditor was required to lift the scrap

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within thirty days from the date of execution, and the Corporate Debtor had

no further obligation beyond informing local authorities prior to removal.

According to the Appellant, the Operational Creditor had lifted the scrap

during February 2019 itself, and thus, no amount remained due.

50. The Appellant further argues that there was no clause in the Agreement

mandating refund of advance payment, and hence, no obligation to repay

could arise in law. The entries in the Corporate Debtor's balance sheet

showing the amount of Rs. 1 crore under "Advance from others" are explained

as mere accounting disclosures, maintained due to non-receipt of GST details

from the Operational Creditor, not as acknowledgment of liability. It is also

argued that the alleged letters dated 01.05.2019, 12.11.2019, 06.06.2022,

and 23.03.2023 are fabricated documents manufactured to create an artificial

extension of limitation and to project a false default. In support, the Appellant

relies on Asset Reconstruction Company (India) Ltd. v. Bishal Jaiswal (2021) 6

SCC 366, contending that entries in financial statements do not constitute

acknowledgment of debt unless accompanied by a clear intention to pay. The

Appellant also asserts that the dispute between the parties was of a purely

civil nature, arising from alleged breach of a contract, and could not be

adjudicated under the IBC.

51. The Respondent No. 2, on the other hand, submits that the amount of

Rs.1 crore was paid to the Corporate Debtor in three tranches between

29.01.2019 and 27.02.2019 towards purchase of scrap and machinery under

the Sale Agreement. Despite repeated requests made through letters dated

01.05.2019, 12.11.2019, 06.06.2022, and 23.03.2023, the Corporate Debtor

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failed to permit collection of the scrap or to refund the advance. The

Respondent emphasizes that all such communications were duly

acknowledged by the Corporate Debtor through its official stamp and seal,

proving continuous correspondence and acknowledgment of liability.

52. The Respondent further points out that the Corporate Debtor's audited

balance sheets for FY 2020-21 and 2021-22 reflect the amount of Rs.1 crore

as "Advance from Others," specifically naming B.N. Enterprises

(proprietorship of the Operational Creditor). No explanatory notes or

disclaimer accompanies these entries, which, according to the Respondent,

constitutes a clear admission of debt.

53. The Respondent has cited the Judgment of Hon'ble Supreme Court in

'Consolidated Construction Consortium Ltd. Vs. Hitro Energy Solutions Pvt. Ltd.'

[(2022) 7 SCC 164] which clarifies that the definition of Operational Debt

encompasses amount paid in advance for the purchase of goods and services.

54. In order to determine whether an "operational debt" exists, the Tribunal

must examine whether the claim arises out of (i) provision of goods or services,

or (ii) a transaction having a direct nexus with operation of the corporate

debtor. It is an admitted fact that the Corporate Debtor received Rs.1 crore

from the Operational Creditor under the Sale Agreement dated 31.01.2019.

The Corporate Debtor's argument that this amount ceased to be a debt,

because the scrap was lifted is unsupported by any evidence such as delivery

receipts, gate passes, weighment slips, or transport records. The mere

assertion that the scrap was "lifted" cannot rebut the consistent documentary

trail of letters written by the Operational Creditor spanning four years,

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repeatedly seeking delivery of scrap or refund of payment. These letters bear

the Corporate Debtor's seal and acknowledgement, which have not been

convincingly explained. There is no reply on record from the Appellant to

controvert this even after receiving the notice of default u/s 8 of the code in

May 2023.

55. The further argument of the Appellant that there was no contractual

clause mandating refund is legally untenable. The law implies an obligation

to refund consideration received, when performance becomes impossible or is

not rendered, as embodied in Sections 65 and 70 of the Indian Contract Act,

1872. Thus, even in the absence of an explicit refund clause, the Corporate

Debtor was legally bound to return the money once it failed to deliver the

goods.

56. We note that the Hon'ble Supreme Court in Consolidated Construction

Consortium Ltd. v. Hitro Energy Solutions Pvt. Ltd. (2022) 7 SCC 164, has held

that a purchaser who has made advance payments for supply of goods is an

operational creditor, when such goods are not supplied. The rationale was

that the debt arises "in respect of provision of goods or services," and failure

to perform creates a right to payment. The relevant extract of the Judgment

is extracted below:

"4. The key points from the aforementioned judgment are as follows:

a. Section 5(21) of the IBC defines 'operational debt' as "a claim in respect of the provision of goods or services". Thus, there must be some nexus of the claim with the provisions of goods and services.

b. Section 8(1) of the IBC in conjunction with Rule 5(1) and Form 3 of the 2016 Application Rules specifies that an operational creditor

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(Appellant herein) may issue a notice regarding an operational debt through either a demand notice or an invoice. Thus, the presence of an invoice for goods or services supplied is not essential, as a demand notice alone is sufficient to establish the existence of a debt.

c. There exist two options for an operational creditor seeking to claim an operational debt in CIRP as per Regulation 7(2)(b)(i) and

(ii) of the CIRP Regulations:

i. Relying on a contract for the supply of goods and services with the corporate debtor;

ii. Presenting an invoice demanding payment for goods and services supplied to the corporate debtor.

The former is wide enough to encompass all types of contracts for the supply of goods and services between the operational creditor and the corporate debtor. Thus, a debt arising from advance payment made to a corporate debtor for the supply of goods or services qualifies as an operational debt."

(Emphasis supplied)

57. Applying that ratio of the Judgment Consolidated construction (supra)

here, the Operational Creditor's claim for refund of advance directly flows from

the Corporate Debtor's failure to deliver goods, and therefore constitutes an

operational debt under Section 5(21) of the Code.

58. We note that the audited financial statements of the Corporate Debtor

further corroborate the Respondent's case. We take a look at the last Balance

Sheet of CD for the FY 2021-22 which is on record. It is to be noted that the

balance sheet of FY 2021-22 has been prepared during the period the new

management was in place The relevant pages of the Balance Sheet of the CD

are at pages 212 and 217 of the appeal are extracted below:

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Company Appeal (AT) (Ins.) No. 1695 of 2024 -22-

Company Appeal (AT) (Ins.) No. 1695 of 2024 -23-

We see clearly that Note 6 in the Balance sheet only gives the total amount of

advance received from others. The details of the same are furnished in

Schedule to the Note 6. None of these entries reflect any qualification by the

Auditors, thereby acknowledging debt without any conditions. Exactly

identical entries are available in Balance Sheet of previous financial years

from 2019-20 onwards.

59. The entries under "Advance from Others - B.N. Enterprises" appearing

in successive financial years clearly reflect the Corporate Debtor's continuing

acknowledgment of the amount. If, as claimed by the Appellant, this was

merely an accounting entry maintained for tax compliance, it would ordinarily

be accompanied by an auditor's note or qualifying remark, which is

conspicuously absent. The absence of such qualification evidences that the

amount was indeed treated as a subsisting liability.

60. The contention that the transaction is "civil in nature" and hence

outside the purview of IBC cannot be accepted. The IBC does not exclude

commercial breaches from its ambit; what is relevant is the existence of a debt

and default. The Code provides a summary remedy to operational creditors to

recover undisputed debts. Once an advance is shown to have been paid and

not returned, and there exists no plausible evidence of discharge, default

stands established.

61. The letters exchanged between the parties, the consistent entries in the

financial statements, and the admitted receipt of money together form a

continuous chain demonstrating the existence of liability. The Corporate

Debtor has not shown any contemporaneous correspondence repudiating

Company Appeal (AT) (Ins.) No. 1695 of 2024 -24-

these claims prior to the demand notice under Section 8. The so-called

"fabrication" theory was raised only after commencement of insolvency

proceedings, and cannot detract from the otherwise consistent evidentiary

record showing the debt and default.

62. Having considered the pleadings, documents, and the legal position, we

are of the view that the Operational Creditor has satisfactorily established: (a)

the payment of Rs.1 crore constituted advance consideration for supply of

goods, (b) the goods were neither delivered nor the consideration refunded,

and (c) the Corporate Debtor's balance sheets and conduct confirm continuing

acknowledgment of liability. Thus existence of "operational debt" and "default"

as defined under Section 5(21) and Section 3(12) respectively of the Code have

been clearly established.

63. We further note that the application is also not hit by limitation as there

is clear acknowledgement of outstanding advance, in the last balance sheet

of the CD for the year 2021-22, which has been placed on record. The

acknowledgement in balance sheet of the CD as on 31.03.2022 has the effect

of extending the limitation period upto 31.03.2025. The petition under Section

9 in this matter was filed on 23.06.2023 which was well within limitation.

64. In this regard we also note that the Hon'ble Supreme Court in Asset

Reconstruction Company (India) Ltd. v. Bishal Jaiswal, (2021) 6 SCC 366,

decisively held that an acknowledgment of liability in a company's balance

sheet constitutes acknowledgment under Section 18 of the Limitation Act,

thereby restarting limitation. This principle was reaffirmed in Dena Bank v.

C. Shivakumar Reddy, (2021) 10 SCC 330, where the Court observed that

Company Appeal (AT) (Ins.) No. 1695 of 2024 -25-

acknowledgment in a balance sheet or in a one-time settlement proposal

renews the period of limitation for the purpose of proceedings under the IBC.

65. Accordingly, we hold that the Adjudicating Authority rightly admitted

the Section 9 application. As it was filed within the limitation period and the

existence of operational debt and default, is found to be legally correct and

based on sound appreciation of facts and law.

66. The second issue raised by the appellant relates to pre-existing

disputes. Under the Code, a Corporate Debtor cannot be dragged into

insolvency proceedings if there exists a genuine and pre-existing dispute

between the parties regarding the debt claimed. Section 9(5)(ii)(d) of the Code

specifically empowers the Adjudicating Authority to reject an application

under Section 9 if it finds that the operational creditor's claim is covered by a

pre-existing dispute.

67. In this case, the question for consideration is whether the alleged

liability of Rs.1 crore, arising from the Sale Agreement dated 31.01.2019, was

genuinely disputed by the Corporate Debtor before the issuance of the

demand notice on 01.05.2023. The answer depends on examining whether

the dispute claimed by the Corporate Debtor--regarding alleged fabrication of

correspondence, denial of liability, or authenticity of signatures--was a bona

fide and existing dispute prior to the statutory notice or merely a belated,

afterthought defence raised to avoid insolvency.

68. The Appellant has contended that the NCLT erred in admitting the

Section 9 application despite the existence of serious disputes. It is argued

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that the Operational Creditor's claim is entirely based on fabricated letters

dated 01.05.2019, 12.11.2019, 06.06.2022, and 23.03.2023, which purport

to have been issued by the Operational Creditor and allegedly acknowledged

by the Corporate Debtor. According to the Appellant, these documents were

forged and bear fake seals and signatures of one "Darshan Palan," who,

according to the Appellant, was neither an employee nor an authorized

representative of the Corporate Debtor. The Appellant further asserts that no

such letters were ever received by the Corporate Debtor and that the

Operational Creditor concocted these documents much later to manufacture

a record of alleged default.

69. It is the submission of the Appellant that a criminal complaint dated

20.07.2024 was filed before the police authorities, alleging forgery and

fabrication of the said documents. This complaint, according to the Appellant,

demonstrates that there was a serious and genuine dispute between the

parties as to the very existence of liability. It is further submitted that the

National E-Governance Services Limited (NeSL) information utility portal

recorded the debt as "disputed," and this ought to have been treated as

sufficient evidence of pre-existing dispute by the Adjudicating Authority.

70. The appellant also contended that the Adjudicating Authority failed to

appreciate that the balance sheet entries showing the amount as "Advance

from Others" did not amount to acknowledgment of liability, and that the

entire dispute was of a purely civil nature arising out of breach of contract,

which could not be the subject matter of insolvency proceedings under the

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IBC. The Appellant thus maintains that the alleged debt was never admitted

and that there existed a genuine dispute as to both facts and documents.

71. Per Contra, the Respondent 2/ Operational Creditor has categorically

denied the Appellant's allegations of fabrication and fraud. It is his

submission that no dispute of any kind was ever raised by the Corporate

Debtor at any time prior to the demand notice dated 01.05.2023. The

Respondent points out that all the letters relied upon were duly signed and

acknowledged by the Corporate Debtor's authorized office with its official seal,

and that those communications clearly established the ongoing default and

repeated requests for refund of the Rs.1 crore advance.

72. It is the contention of the Respondent that the so-called "police

complaint" dated 20.07.2024 was filed long after the Section 9 application

had been admitted and reserved for orders, and therefore cannot qualify as a

"pre-existing dispute." According to the Respondent, the complaint was lodged

nearly five years after the transaction; more than a year after the demand

notice; and only after the Corporate Debtor's right to file a reply had been

closed by the NCLT on 23.04.2024. He emphasized that a dispute raised after

the commencement of proceedings cannot be treated as a bona fide pre-

existing dispute.

73. As regards the NeSL entry showing the debt as "disputed," the

Respondent explains that this entry was unilaterally marked by the Corporate

Debtor without any substantiating document, and therefore cannot override

the consistent written record and acknowledgments of liability in the

Corporate Debtor's financial statements. He also pointed out that the

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Corporate Debtor repeatedly sought time to file its reply before the NCLT, but

failed to do so within the stipulated period, which further indicates that there

was no genuine dispute in existence prior to the proceedings.

74. In determining whether a dispute is "pre-existing," we apply the test

laid down by the Hon'ble Supreme Court in Mobilox Innovations Pvt. Ltd. v.

Kirusa Software Pvt. Ltd. (2018) 1 SCC 353. In this case the Court held that

the dispute must be (i) plausible, and (ii) must have arisen before the receipt

of the demand notice. Mere assertion of a dispute or the filing of a complaint

after the commencement of insolvency proceedings is insufficient to oust the

jurisdiction of the Adjudicating Authority under Section 9 of the Code. The

relevant paragraph 51 of the Mobilox Judgement is extracted below:

"51. It is clear, therefore, that once the operational creditor has filed an application, which is otherwise complete, the adjudicating authority must reject the application under Section 9(5)(i)(d) if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility. It is clear that such notice must bring to the notice of the operational creditor the "existence" of a dispute or the fact that a suit or arbitration proceeding relating to a dispute is pending between the parties. Therefore, all that the adjudicating authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the "dispute" is not a patently feeble legal argument or an assertion of fact unsupported by evidence. It is important to separate the grain from the chaff and to reject a spurious defence which is mere bluster. However, in doing so, the Court does not need to be satisfied that the defence is likely to succeed. The Court does not at this stage examine the merits of the dispute except to the extent indicated above. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application."

Company Appeal (AT) (Ins.) No. 1695 of 2024 -29-

75. In the present case, we note that the demand notice under Section 8

was issued on 01.05.2023. The only document relied upon by the Appellant

to show a dispute is a police complaint dated 20.07.2024--filed more than

fourteen months later. 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 Rs.1 crore transaction before that date. Even during the entire period

between 2019 and 2023, there is no correspondence from the Corporate

Debtor questioning the Operational Creditor's repeated communications or

denying its obligation to refund.

76. On the contrary, the record shows that the letters from the Operational

Creditor dated 01.05.2019, 12.11.2019, 06.06.2022, and 23.03.2023 were

duly received and acknowledged with the official stamp of the Corporate

Debtor. These letters form a consistent chain of correspondence showing that

the Operational Creditor repeatedly demanded either delivery of scrap or

refund of the amount, and the Corporate Debtor never repudiated these

claims. If, as alleged, these letters were fabricated, it is not explained why no

immediate protest or action was taken. It is highly improbable that the

Corporate Debtor would remain silent for more than four years and suddenly,

after the case was reserved for orders, come forward to claim forgery.

77. It is also important to note that these letters were received by the

Corporate Debtor prior to the Appellant assuming directorship of the

company. Furthermore, the last letter dated 23.03.2023 reflects the updated

address of the Corporate Debtor, So, the respondent cannot claim that the

Company Appeal (AT) (Ins.) No. 1695 of 2024 -30-

letter has been sent to the old address. The entire chain of correspondence,

in fact shows the sincerity and diligence of the OC in pursuing his refund

from the CD.

78. The belated police complaint filed on 20.07.2024 appears to be an

afterthought. Its timing, after the case was reserved for judgment, clearly

indicates that it was filed to create a semblance of dispute when none existed

earlier. Courts have consistently held that a dispute fabricated after issuance

of demand notice or after filing of the Section 9 petition does not qualify as a

"pre-existing dispute." The ratio in Mobilox (supra) and subsequent decisions

such as Kay Bouvet Engineering Ltd. v. Overseas Infrastructure Alliance (India)

Pvt. Ltd. (2021) SCC OnLine SC 1349 reinforce this principle.

79. The contention regarding the NeSL portal is also not convincing. The

Code does not treat the NeSL information as determinative of the existence of

a dispute. The mere marking of a debt as "disputed" on the portal, without

supporting evidence, cannot override the underlying contractual documents

and financial records. Moreover, the Corporate Debtor's audited financial

statements for FY 2020-21 and 2021-22 continue to reflect the amount of

Rs.1 crore under the head "Advance from Others - B.N. Enterprises," without

any qualification or disclaimer. These audited statements, prepared and

signed under statutory obligation, are reliable indicators that the Corporate

Debtor treated the amount as an outstanding liability, not as a disputed

claim.

80. It is also pertinent that the Corporate Debtor failed to file its reply before

the NCLT despite repeated opportunities and only attempted to do so belatedly

Company Appeal (AT) (Ins.) No. 1695 of 2024 -31-

on 01.08.2024, after its right had been closed on 23.04.2024. This pattern of

conduct reinforces the inference that the dispute now alleged was not a

genuine one, but raised as an afterthought to resist insolvency proceedings.

81. We find that the Appellant has failed to establish the existence of any

bona fide, pre-existing dispute. The allegations of forgery and fabrication are

wholly unsubstantiated, raised belatedly, and evidently designed to frustrate

the insolvency process. The police complaint lodged after the conclusion of

hearing is not contemporaneous evidence of dispute, but an afterthought. The

balance sheets, correspondence, and unrefuted demands of the Operational

Creditor all point to the existence of an undisputed debt and default.

82. We are of the view that the Adjudicating Authority correctly applied the

Mobilox test and rightly concluded that the defence set up by the Corporate

Debtor was moonshine defence and not supported by any pre-existing

dispute. There was no credible dispute that could bar the admission of the

Section 9 petition.

83. In view of above findings, we find no infirmity in the order of the

Adjudicating Authority admitting the application under Section 9 of the Code.

The appeal is dismissed. Pending IAs, if any, are closed. No order as to costs.

[Justice Yogesh Khanna] Member (Judicial)

[Mr. Indevar Pandey] Member (Technical) SA/Pragya (LRA)

Company Appeal (AT) (Ins.) No. 1695 of 2024