SECTION 9 APPLICATION IS NOT MAINTAINABLE IN THE ABSENCE OF STRICT PROOF OF DEBT AND DEFAULT

[Mr. M. GOVINDARAJAN]

CIRP by operational creditor

Section 8 and 9 of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) provide the procedure for initiating corporate insolvency resolution process (‘CIRP’ for short) by an Operational Creditor (‘OC’ for short).

Section 8 of the Code provides that an operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor. The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice, bring to the notice of the corporate debtor about the existence of dispute or the details of payment made by it.

Section 9 of the Code provides that after the expiry of the period of 10 days from the date of delivery of the notice or invoice demanding payment if the operational creditor does not receive payment from the corporate debtor or notice of the dispute, the operational creditor may file an application before the Adjudicating Authority for initiating a CIRP. The Adjudicating Authority shall within 14 days from the date of filing of the application admit the application or reject the application.

Strict proof of debt and default

It is the obligation on the part of the operational creditor, in his application for CIRP, to prove the debt and default otherwise the Adjudicating Authority may reject the application for CIRP.

In MITTAL POLYMERS VERSUS SUVARNA ADDITIVES PRIVATE LIMITED - 2024 (6) TMI 960 - NATIONAL COMPANY LAW TRIBUNAL MUMBAI BENCH, a CIRP was initiated by the petitioner against the Corporate Debtor under Section 9 of the Code for the default of the Corporate Debtor to the tune of Rs.2.33 crores. The OC is a Small and medium Enterprise. The default is based on several unpaid invoices issued by the OC during the period between 2015 and 2019 in lieu of selling and supplying goods to the CD. The date of default is 16.09.2019, i.e., the date on which the CD finally stopped making payments towards the invoice dated 02.05.2019, bearing No. 29 issued by the OC to the CD.

The OC submitted the following before the Adjudicating Authority-

• The CD is a Private Limited Company, engaged in the business of chemicals.
• The OC sold and supplied raw materials to the CD during the period between January, 2011 and December, 2018.
• The OC issued several invoices to the CD, the first one dated 10.04.2015, bearing No. 15 for Rs. 13,94,213/- and the last invoice dated 02.05.2019 for Rs. 94,400/-.
•  It had raised the invoices to the tune of Rs.3,16,64,209/-. Out of this, the CD has made payments of Rs. 2,04,46,631/- during the period from 2015 to 2019.
• The CD did not raise any dispute over the quality or quantity of the supplied raw materials.
• Despite the receipt of demand notice on 02.12.2019 by the CD, it not only failed to give any reply but also did not make any payment towards settling the outstanding dues.
• The OC is also entitled to claim interest upon the amount raised through unpaid invoices as per Section 15 and 16 of the MSMED Act.

To substantiate its contention, the OC relied on the Affidavit dated 17.01.2020 as well as its computation chart containing details of invoices raised, payment received from the CD and the interest calculated thereon as per the MSMED Act. The OC has placed on record a statement of its bank account for the period from 01.11.2019 to 24.12.2019, showing that the CD has made part payment of Rs. 50,000/- after issuance of the demand notice dated 15.11.2019.

On account of non-appearance of the CD on different occasions, its right to file reply was forfeited by the Adjudicating Authority vide its order dated 13.10.2023. The CD submitted before the Adjudicating Authority it proposed to file an application to recall the order of Adjudicating Authority. On 22.11.2023, the CD submitted that the matter was being settled with the OC and, hence, the Adjudicating Authority allowed settlement as a last chance and listed on 15.12.2023 for reporting settlement.

The CD did not file any application for recalling the order of Adjudicating Authority and also did not come forward with the settlement plan. Even though the CD filed reply along with the delay condonation petition the Adjudicating Authority did not take cognizance of the reply filed by the CD.

The Adjudicating Authority then proceeded the case on merit. The Adjudicating Authority observed that the bank statement produced by the OC only suggests that it has not received any payment from the CD from 03.12.2019 to 19.12.2019. The OC has not produced any ledger or annual financial statement which could have thrown light into the alleged debt or default committed by the CD. The only documents produced by the OC in order to prove debt and default is its own computation of claims and the demand notice dated 15.11.2019 which are insufficient for this Adjudicatory Authority to determine the maintainability of the present Application.

The Adjudicating Authority held that Section 9 Application is not maintainable in the absence of strict proof of debt and default. This issue is held against the OC. Since the OC did not produce any invoice on record, it is difficult to ascertain the veracity of its claims and upon perusal of its computation of claims, the Adjudicating Authority found that all the invoices were raised during the period from 10.05.2015 to 31.12.2017. There is no evidence to suggest whether the alleged debt has been acknowledged by the CD. The bank account statement produced by the OC indicates receipt of Rs. 50,000/- from the CD 15.11.2019. However, in the absence of any purchase order or invoice, the Adjudicating Authority cannot presume that the amount was in relation to any debt or liability as alleged by the OC. Since the application was filed after the limitation period the application is rejected on the limitation period. The Adjudicating Authority rejected the CIRP application filed by the operational creditor.