Unadjusted Trade Advance Payable With Interest Rate Qualifies As Financial Debt U/S 5(8) Of IBC: NCLAT

Brief Facts:

This Appeal has been filed under section 61 of the IBC against the Order dated 04.07.2023 passed by the National Company Law Tribunal (Adjudicating Authority), by which the Adjudicating Authority has rejected the petition under section 7 of the IBC filed by the Akzo Nobel India Ltd. /Appellant solely on the ground of limitation.

An agreement was executed between the Appellant and the Respondent by which a trade advance to the tune of Rs. ₹2,40,50,000/- in December 2017 and January 2018 was extended by the Appellant which was to be adjusted over five years against the sale of worth Rs. 6.5 crores.

There was a three year lock period in the agreement as well. As per clause 10 of the Agreement, if there was a shortfall in the agreed annual sales, interest at the interest of 12% would be charged. However, the corporate debtor managed to conduct business worth only Rs. 40 Lakhs.

Thereafter, several communications took place between the parties as the Respondent was not able to meet the yearly targets as per the Agreement dated 21-11-2017, which as per the said agreement resulted in a levy of interest @ 12% per annum on the unutilized amount.

Appellant filed a petition under Section 7 of the code against the Respondent Corporate Debtor on 28.10.2022. The Adjudicating Authority in the Impugned Order decided that the Appellants qualify as financial creditors of the Respondent in the given set of facts and circumstances on record, but rejected the insolvency petition of the Appellant on the sole ground of limitation erroneously.

Against the above dismissal, the present appeal has been filed.

Contentions:

The Appellant submitted that in view of acknowledgement vide email dated 27.12.2019, as per section 18 of the Limitation Act, the time period was bound to be computed from 27.12.2019.

Per contra, the Respondent submitted that the claim of the Appellant emanates from the Agreement dated 21.11.2017. The present Application has been filed before the Hon'ble Adjudicating Authority on October 3, 2022, i.e., approximately after 5 years of the date of Agreement, way beyond statutory period of 3 years. The alleged Promissory note dated November 21, 2017, is also unenforceable as per the law of limitation.

It was further submitted that the email dated December 27, 2019, will not amount to the admission of debt as there is no admission of any outstanding amount as debt by the Respondents herein, and it is misrepresented by the Appellant as admission by the Respondent.

It was further submitted that had the Respondent met the trade targets, the amount would have been adjusted as a trade discount therefore it cannot be qualified as an advance against consideration of time value of money.

It was further submitted that even if it is accepted that the agreement was valid, the Appellant's failure to comply with the terms of the agreement renders it invalid and unenforceable.

Lastly, it was submitted that the Appellant with an intention to arm-twist the Respondent, has sought Specific Performance of the contract, when there may be breach of contract at best. The Code is not a platform for specific performance of a contract, much less a forum for recovery of any damages arising out of breach of contract, if any.

Observations:

The Tribunal noted that clause 7 of the agreement is the important clause which states that the money given by the Appellant as a trade advance shall be adjusted towards the purchase made by the Respondent. Furthermore, second proviso to clause 7 states that any unadjusted trade advance shall be treated as a loan amount advanced by the Appellant to the Respondent carrying interest at the rate of 1% per month from the date of advance till the entire payment is made. This clearly establishes the requirement of time value of money in case a default is committed by the Respondent. Therefore, the Adjudicating Authority was right in concluding that the trade advance was a financial debt.

It further observed that the email sought to be projected as an acknowledgement of debt does not amount to the acknowledgement of the debt by the Respondent as it only disclosed the poor business conditions and related difficulties. Therefore, it cannot be considered as an acknowledgement under the law.

Coming to the next contention of the Appellant, it observed that the limitation period from 15.03.2020 to 31.05.2022 has been excluded by the Hon'ble Supreme Court for all purposes vide their suo motu Writ Petition (C) No.-3 of 2020 vide their Order dated 10.01,2022.

Based on the above, it held that as per the Suo-Motu Judgement (supra) the balance period of limitation from 15.03.2020 has to be added to 01.03.2022 to get the revised date of limitation. In the instant case the period is one year 8 months and 6 days. The revised end date of limitation would then be 06.11.2023. The section 7 application in this case was filed on 28.10.2022 which was well within limitation period.

In light of the above discussion, the Tribunal concluded that “the Adjudicating Authority has rightly classified the Appellant as Financial Creditor. However, the issue of limitation has been decided by the Adjudicating Authority without taking into account the directions of Hon'ble SC in suo motu proceeding (supra) due to which the Section 7 application was not found maintainable. Whereas the same is well within the limitation period after applying a grace period as per Hon'ble SC's order.”

Accordingly, the present appeal was allowed and the impugned order was set aside.

Case Title:Akzo Nobel India Ltd. Versus Stan Cars Pvt. Ltd.

Case Number: Company Appeal (AT) (Ins.) No. 1294 of 2023

Judgment Date: 03/07/2025

For Appellant: Mr. A.S Likhari, Advocate.

For Respondents: Mr. Ashraf Belal, Advocate.

Click Here To Read/Download The Order