Disputes by Corporate Debtor Deemed Spurious; Appellate Tribunal Directs Payment or Initiation of Insolvency Proceedings
In a significant ruling, the National Company Law Appellate Tribunal (NCLAT) has set aside the National Company Law Tribunal's (NCLT) decision to reject Uniworth Enterprises LLP's Section 9 application under the Insolvency and Bankruptcy Code (IBC). The NCLAT has directed M/s. Starco Metaplast Private Limited, the corporate debtor, to settle the operational debt of Rs. 2,83,84,205 within 15 days. Failing this, the Corporate Insolvency Resolution Process (CIRP) will be initiated.
The case revolves around an operational debt claim by Uniworth Enterprises LLP, which was dismissed by the NCLT based on alleged pre-existing disputes. However, the NCLAT, led by Justice Mohd. Faiz Alam Khan and Mr. Arun Baroka, found the disputes raised by Starco Metaplast to be "spurious" and "moonshine," lacking any legal merit.
The appellate tribunal's decision came after a detailed examination of the running account between the parties, where payments were adjusted using the First-In-First-Out (FIFO) method-a customary practice in their dealings. The NCLAT observed that no specific instructions were given by Starco Metaplast regarding the appropriation of payments, affirming Uniworth’s method of payment adjustment.
Central to the NCLT's earlier rejection was the admission of additional documents by Starco Metaplast after the conclusion of final arguments, which Uniworth contested as a violation of natural justice. However, the NCLAT found no procedural impropriety in allowing these documents, citing the need for fair adjudication.
In its analysis, the NCLAT emphasized the admission of debt by Starco Metaplast, which had agreed to settle Rs. 1,91,80,733 in instalments. The tribunal clarified that even after accounting for disputed debit notes and alleged damages, the debt exceeded the statutory threshold for initiating CIRP.
The judgment also tackled the issue of running accounts, rejecting Starco Metaplast's claim that payments were made on an invoice basis. The tribunal held that the absence of specific instructions from Starco Metaplast justified Uniworth's adjustment of payments on a FIFO basis.
Finally, the NCLAT ordered Starco Metaplast to clear the outstanding dues within 15 days or face insolvency proceedings, marking a crucial precedent in insolvency jurisprudence under the IBC.
Bottom line:-
Insolvency and Bankruptcy Code, 2016 Section 9 application cannot be rejected on the grounds of a pre-existing dispute if such disputes are found to be spurious, moonshine, or without merit. Payments made on a running account basis can be adjusted by the operational creditor based on customary practices, including the First-In-First-Out (FIFO) method, unless the corporate debtor provides specific instructions for appropriation.
Statutory provision(s):
Insolvency and Bankruptcy Code, 2016 - Sections 9, 10A, 61
