Amount Paid As Advance Consideration Constitutes Operational Debt Under Section 5(21) Of IBC: NCLAT
Mohd Malik Chauhan
24 Oct 2025 5:35 PM IST
The National Company Law Appellate Tribunal (NCLAT) New Delhi held that an amount paid as advance consideration constitutes an Operational Debt under section 5(21) of the IBC especially when the said amount is reflected in the audited balance sheet of the corporate debtor as advance without any qualifying note by the auditor. A bench comprising Justice Yogesh Khanna (Judicial Member)...
The National Company Law Appellate Tribunal (NCLAT) New Delhi held that an amount paid as advance consideration constitutes an Operational Debt under section 5(21) of the IBC especially when the said amount is reflected in the audited balance sheet of the corporate debtor as advance without any qualifying note by the auditor.
A bench comprising Justice Yogesh Khanna (Judicial Member) and Mr. Indevar Pandey (Technical Member) 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”.
Background:
The Appeal arose from an order passed by National Company Law Tribunal (NCLT) Ahmedabad by which it had admitted a petition under section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) filed by Hiralal Bhimjibhai Kumavat against Vasundhara Seamless Stainless Tubes Pvt. Ltd. (“Corporate Debtor”).
The petition originated from a sale agreement for the purchase of machineries and scrap worth ₹1 crore from the Corporate Debtor. The operational creditor had paid the entire amount in three tranches but it alleged that the corporate debtor neither permitted removal of scrap nor refunded the advance. The Adjudicating Authority admitted the petition holding that the unpaid advance amount constituted an operational debt under the IBC.
The Appellant submitted that the transaction did not constitute operation debt under section 5(21) of the IBC as it was a one time sale of scrap and machinery, not a service or supply contract. It was further argued that the default did not occur as the scrap had already been lifted by the operational creditor in 2019. It was further submitted that since the sale agreement did not contain any clause for refund of advance, no legally enforceable debt existed.
Per contra, the respondent submitted that several letters and reminders requesting permission to lift the scrap were duly acknowledged with the company's official stamp, showing continuing correspondence and acknowledgment of liability. It was further argued that the amount of Rs. 1 crore was reflected as advance from BN Enterprises in the corporate debtor's balance sheet without any qualifying note by the auditors.
Lastly, it was submitted that there was no pre-existing dispute as the police complaint of forgery was not filed before the demand notice was issued. It came to be filed only after the matter had been heard and reserved for orders by NCLT.
Findings:
The Tribunal at the outset observed that 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 IBC. It held that “the purchaser who has made advance payments for supply of goods is an operational creditor when such goods are not supplied. The debt arises in respect of the provision of goods or services, and failure to perform creates a right to payment,” relying on Consolidated Construction Consortium.
The Tribunal further observed that that the audited balance sheets for FY 2020–21 and 2021–22 demonstrated that the amount was reflected as “Advance from Others – B.N. Enterprises” without any auditor qualification. “If these were mere accounting disclosures for GST compliance, they would ordinarily be accompanied by a qualifying note or disclaimer. The absence of such qualification indicates that the amount was treated as a subsisting liability,” the Tribunal held.
Citing Bishal Jaiswal, the Tribunal held that entries in a company's balance sheet constitute an acknowledgement under section 18 of the Limitation Act. Applying the test laid down in Mobilox, The tribunal held that the pre-existing dispute must be real and existing before the issuance of the demand notice. “The so-called police complaint dated 20.07.2024 was filed nearly five years after the transaction and more than a year after the demand notice. It is clearly an afterthought to create an illusion of dispute,” the Bench observed.
The Tribunal further held that 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 indicated that there was no genuine pre-existing dispute.
The Tribunal concluded that “Once an advance is shown to have been paid and not returned, and there exists no plausible evidence of discharge, default stands established”.
Accordingly, the present appeal was dismissed.
Case Title:Rakesh Bhailalbhai Patel Versus Vasundhara Seamless Stainless Tubes Private Limited
Case Number: Company Appeal (AT) (Ins.) No. 1695 of 2024
Judgment Date: 17/10/2025