Navin Madhavji Mehta Vs. Jaldhi Overseas Pte Ltd & Ors.: NCLAT Holds Section 9 IBC Application Not Maintainable when Debt is Disputed

Introduction:

The National Company Law Appellate Tribunal (NCLAT) has reaffirmed that an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) cannot be entertained when the debt is not unequivocally admitted by the Corporate Debtor. In this case, RR Metalmakers India Ltd. (Corporate Debtor) had allegedly defaulted on freight and demurrage payments owed to Jaldhi Overseas Pvt. Ltd. (Operational Creditor) under a Charter Party Agreement. However, the Corporate Debtor consistently disputed the debt, arguing that payments were made through a third-party entity. The NCLT, Mumbai Bench, admitted the Section 9 application, initiating the Corporate Insolvency Resolution Process (CIRP), leading to an appeal before NCLAT.

Upon review, the NCLAT set aside the NCLT order, ruling that when a real dispute exists regarding debt and default, insolvency proceedings cannot be misused as a debt recovery tool. The Tribunal relied on Supreme Court precedents, including Mobilox Innovations v. Kirusa Software (2017), to establish that mere claims without clear admission of liability do not justify CIRP initiation.

Background:

The dispute between Jaldhi Overseas Pvt. Ltd. (Operational Creditor) and RR Metalmakers India Ltd. (Corporate Debtor) arose from a Charter Party Agreement dated 15.03.2017, under which the Corporate Debtor had engaged the Operational Creditor for chartering the vessel MV Aetolia to transport cargo from Port Redi (India) to China for delivery to BST (HK) Ltd.. The transaction was facilitated by Bulk Chart, a broker. As per the agreement, the Corporate Debtor was required to make payments towards freight charges and demurrage. However, the Operational Creditor alleged that the payments were not made and initiated legal proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC).

On 02.02.2020, the Operational Creditor issued a demand notice under Section 8 of IBC, claiming non-payment of USD 523,141.45 towards freight and demurrage charges. In response, the Corporate Debtor replied on 09.03.2020, disputing the debt and asserting that the payments had already been made through Samruddha Resources Ltd., a third-party entity involved in the transaction. Despite this, the Operational Creditor proceeded to file an application under Section 9 of IBC, seeking initiation of Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor. On 22.04.2024, the NCLT, Mumbai Bench, admitted the Section 9 application, holding that the Corporate Debtor had acknowledged its liability and had defaulted in payment. Aggrieved by this decision, the Corporate Debtor approached the NCLAT challenging the NCLT’s ruling.

Before the NCLAT, the Corporate Debtor argued that the debt was not operational and was not unequivocally admitted, making the Section 9 application non-maintainable. It contended that freight and demurrage charges were settled through Samruddha, BST, or other entities and that the Operational Creditor’s claim was disputed from the outset. On the other hand, the Operational Creditor insisted that the Corporate Debtor had accepted liability for both freight and demurrage charges and that the demand was not contested within the statutory period. The NCLAT was thus required to determine whether CIRP proceedings could be initiated despite the existence of a pre-existing dispute and whether demurrage charges could qualify as operational debt under IBC.

Questions of Law:

1. Whether an application under Section 9 of the IBC can be admitted when the Corporate Debtor disputes the debt?
2. Whether demurrage charges qualify as 'operational debt' under Section 5(21) of the IBC?
3. Whether limitation under the Limitation Act, 1963, bars the claim made by the Operational Creditor?
4. Whether an insolvency proceeding can be used as a debt recovery mechanism in the presence of a pre-existing dispute?

Findings and Rationale:

1. Pre-existing Dispute Over Debt and Default: The Tribunal examined the Charter Party Agreement and found that the Corporate Debtor had continuously denied liability for the alleged outstanding amount. It disputed the validity of the invoices and debit notes and contended that payments had already been made via Samruddha Resources Ltd.. The Tribunal relied on the Supreme Court’s decision in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2017) 1 SCC 744, which laid down that a genuine dispute must exist before the demand notice is issued. Since the Corporate Debtor had raised a dispute in response to the Section 8 Demand Notice, the conditions under Section 9(5)(ii)(d) of the IBC were not fulfilled, making the application non-maintainable. The Court observed: "When Operational Creditor seeks to initiate insolvency process against a Corporate Debtor, it can only be done in clear cases where no real dispute exists between the two, which is not so borne out given the facts of the present case."
2. Demurrage Charges Do Not Constitute Operational Debt: The Tribunal addressed the nature of demurrage charges and whether they constitute operational debt under Section 5(21) of the IBC. It relied on LCL Logistix India Pvt. Ltd. v. Waaree Energies Ltd. (2020), where it was held that demurrage is not an operational debt unless it crystallizes into a payable amount through adjudication or mutual agreement. The NCLAT concluded that since the Corporate Debtor had explicitly disputed the demurrage liability and no agreement on the claim existed, the demand did not qualify as operational debt under IBC. The Court observed: "Demurrage was not a crystallized claim and was merely an unliquidated claim, requiring adjudication in civil proceedings rather than summary insolvency proceedings."
3. Limitation Act and Acknowledgment of Debt: The Tribunal examined whether the debt claim was time-barred. The Operational Creditor relied on a letter dated 09.03.2020 as an acknowledgment of liability under Section 18 of the Limitation Act, 1963. However, the Tribunal noted that the letter merely referenced discussions about payment negotiations and did not constitute a clear and unconditional acknowledgment of debt. Relying on Dena Bank v. C. Shivakumar Reddy (2021) 10 SCC 330, the Tribunal held that the acknowledgment must be specific and unequivocal, which was not the case here. The Court observed: "The letter dated 09.03.2020 does not indicate a clear admission of liability but rather an ongoing negotiation process. Therefore, it does not qualify as an acknowledgment under Section 18 of the Limitation Act."
4. Misuse of Insolvency Proceedings for Debt Recovery :The Tribunal emphasized that IBC is not a tool for debt recovery but a mechanism for resolving insolvency. Quoting the Supreme Court in Transmission Corporation of Andhra Pradesh Ltd. v. Equipment Conductors and Cables Ltd. (2018) 16 SCC 660, the NCLAT reiterated that insolvency proceedings cannot be used as a substitute for civil recovery suits.The Court observed: "Once the existence of a pre-existing dispute is established, the application under Section 9 is not maintainable, as insolvency law is meant for resolution and not for coercing payment of disputed debts."

Conclusion:

The NCLAT, New Delhi, set aside the NCLT, Mumbai’s order admitting insolvency proceedings against the Corporate Debtor, holding that IBC cannot be used as a tool for debt recovery when a genuine dispute exists. The Tribunal emphasized that the debt was not unequivocally admitted, and demurrage charges did not automatically qualify as operational debt. Applying the Mobilox Innovations (2017) test, it ruled that insolvency proceedings must be initiated only in clear cases of uncontested debt and default. Consequently, the Section 9 application was dismissed, reinforcing that commercial disputes must be adjudicated separately and not through the IBC framework.

Disclaimer

This post is for educational and informational purposes only. It is not intended to defame, discredit, or tarnish the reputation of any individual, entity, or organization. The opinions expressed are based on publicly available judicial decisions and are aimed at fostering a better understanding of legal principles. For specific legal advice, readers are encouraged to consult a professional.