Determining the Date of Default under Section 9 – The usual Conundrum
Amir Bavani (Founder, AB Legal), Rishika Kumar (Senior Associate, AB Legal) and Pragati Prajapati (Associate, AB Legal)
Introduction
Many unanswered questions have persisted since the implementation of the Insolvency and Bankruptcy Code of 2016 (“the IBC/Code”), and few concrete solutions have been laid down by the judiciary which have further been affirmed and introduced under the Code as amendment by the legislature. However, there are very peculiar issues still subsisting in the Code, as it is fairly new Code having prolonged teething problems, of which one of the major issues that is usually encountered while filing an application under Section 9 of the IBC, is determining the date of default. It is a common knowledge that the date of default and the amount of debt are vital conditions for the initiating the insolvency process. The Hon’ble National Company Law Appellate Tribunal (“NCLAT”) Delhi Bench in the matter of Kodeboyina Srinivas Krishna vs PVM Innvensys Pvt. Ltd. & Anr. (2020) ibclaw.in 92 NCLAT on 25.09.2020 held that “the Demand Notice in Form 3 also requires the date of default to be explicitly mentioned in the notice so that on the basis of documents the debt amount and the date of default could be ascertained”. Henceforth, it is imperative that the precise date of default be explicitly delineated within the application for the IBC.
Importance of mentioning the Date of Default in Application
In certain matters, the Adjudicating Authority has allowed the application even in cases where the specific date of default has not been mentioned. For instance, the National Company Law Tribunal (“NCLT”) Delhi Bench on 27.07.2023 stated that “Hence, we observe that the non-mentioning of the Date of Default does not affect the merits of the present case” in the case of M/s. Geocon Infra Pvt. Ltd. vs. M/s. Brij Gopal Construction Company Pvt. Ltd. (2023) ibclaw.in 392 NCLT. The Adjudicating Authority in the said case held that, although the particular date of default was not explicitly stated in either the Demand Notice or Part-IV of the application, it inferred the date of default to be 30 days from the last invoice upon perusal of invoices. Consequently, the Adjudicating Authority admitted the application.
However, there are several matters wherein the Adjudicating Authority, even when the debt was established, has rejected the application only on the pretext that the date of default is not mentioned. In the matter of M/s LBF Publication Pvt. Ltd. vs. A & A Business Consulting Pvt. Ltd. (2023) ibclaw.in 517 NCLT, the Hon’ble NCLT Mumbai Bench on 10.08.2023 came to the conclusion that, “Though there exists debt in the absence of due date the date of default could not been ascertained hence, this petition does not satisfy the conditions u/s 8 of the Code i.e., occurrence of default. In view of the above, we find that the present case is fit for dismissal”.
Similarly, in Winntus Scaffolding Pvt. Ltd. Vs. Aishwarya Business Corporation Pvt. Ltd. (2023) ibclaw.in 147 NCLT, wherein the Hon’ble NCLT Kochi Bench on 26.04.2023 held that “The Rule 6 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules 2016 prescribed form 5 for filing petition under section 9 IBC 2016 by operational creditors. In the form Part IV Serial No.2 specifically required to mention the date of default, so furnishing the date of default is must”.
While it is true that the Adjudicating Authority has on certain occasions, approved applications that lack a specific date of default, it is certain to acknowledge that the omission of this particular information in a Section 9 application could lead to significant repercussions. Therefore, it is crucial to ensure that the correct date of default is mentioned in both the demand notice under Section 8 and in the application filed under the Section 9 of the IBC.
Nevertheless, there has been a lack of clarity around the perspective of date of default under Section 9 Application. The present article ponders upon the determination of the suitable date of default under Section 9 Application of the Code, for the commencement of an insolvency proceeding.
Date of Default and Limitation
The proceedings under the IBC cannot be initiated if the claim is time-barred. It is of the utmost importance to determine the correct date of default because the said date will determine the period of limitation. Since the inception of the IBC, applications filed under Section 9 are subject to the Limitation Act, so the provisions of Article 137 of the Limitation Act are relevant. For “any other application for which no period of limitation is provided elsewhere,” the Limitation Act’s Article 137 specifies a three-year statute of limitations beginning on the date the right to apply arises. Additionally, after the second amendment in the year 2018, Section 238A was incorporated in the IBC which specifies that “the provisions of the Limitation Act, 1963 shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be”. Therefore, the “right to sue” accrues when a default takes place.
At this juncture, it is relevant to lay down the definition of default that is provided by section 3 (12) of the IBC, which states that:
“non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be”
Since the word “debt” is mentioned in the definition of default in Section 3(12), we need to refer to definition of debt under Section 3(11) of the IBC which is as follows:
“a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt”
It is relevant to highlight herein the ruling of the Hon’ble Supreme Court of India in the matter of Innoventive Industries Ltd. v. ICICI Bank & Anr. (2017) ibclaw.in 02 SC on 31.08.2017 which states that “a debt may not be due if it is not payable in law or in fact,”.
At this juncture, it is worth mentioning that, the Hon’ble NCLT Delhi Bench, on 28.03.2023, held that “the date of default can only be calculated when the invoice becomes due and payable” in the case of SSP Pvt. Ltd. vs. Govind Jee Dairy Milk Pvt. Ltd. (2023) ibclaw.in 131 NCLT. Thereupon, the same was challenged before the National Company Law Appellate Tribunal (‘NCLAT’), wherein the order of NCLT was upheld. This, further brings in a thought of determining the date of default through the invoices.
Date of Default – First Invoice Date or Last Invoice Date?
Now, the relevant question that arises is, when determining the date of default, which invoice date should be taken into consideration? The Operational Creditor will generate multiple invoices throughout the course of business for various goods delivered and/or services rendered. It is necessary to determine which invoice date, amongst all, shall be used as the date of default.
The Hon’ble Supreme Court of India in the case of M/s. Next Education India Pvt. Ltd. Vs. M/s. K12 Techno Services Pvt. Ltd. (2023) ibclaw.in 39 SC on 27.03.2023 held that “the NCLT did not take into consideration the subsequent invoices at least preceding three years from the date of filing of Section 9 application, which ought to have been considered. Under the circumstances, the NCLT ought to have considered the invoices at least for the period preceding three years from the date of the application under Section 9, rather than considering the starting point of limitation as 12.03.2011”, citing the decision of the Hon’ble Apex Court in the case of Laxmi Trading Corporation Vs. Hindustan Construction Company Ltd. (2023) ibclaw.in 540 NCLT, the Hon’ble Mumbai Bench on 25.08.2023 has concluded that, “the ratio of this decision is that the date of default is to determine with reference to each invoice and invoices which are beyond the period of 3 years of the date of filing are to be excluded, unless the period of limitation is extended u/s 18 of the Limitation Act by way of acknowledgement”.
Further, in the case of OM Industries Vs. Birla Precision Technologies Ltd. (2023) ibclaw.in 397 NCLT, the Hon’ble Mumbai Bench on 27.07.2023 held that, “Accordingly, it is evident that eligibility of each invoice needs to be considered separately in order to determine the threshold limit of Rs. 1 Crore. In the instant case, if the due date of all the invoices are accessed separately and the invoices which fall within the period of 10A are excluded, the claimed amount of the remaining invoices do not meet the threshold limit requirement”.
In many instances, Adjudicating Authority has considered the date of the first invoice as the date of default. This raises a pertinent question now, that is, if the date of the first invoice is considered as the date of default, does that imply that the full amount of the debt is due on that date? The Hon’ble NCLT Kochi Bench in the case of Winntus Scaffolding Private Limited (Supra) has deduced that “…The first invoice was raised by the petitioner for the period December 2018 for a sum of Rs.1,45,580/- the due date for the said amount is mentioned as 09.01.20219….Further as on 09.1.2019 the due amount is only Rs.1,45,580/- but in the petition it is mentioned as if full debt amount is due from 09.01.2019, so the default date is not mentioned in the petition. From the Bank statement (Annexure page 203 II volume of petition) it appears that last payment of Rs.2,00,000/- was paid on 13.11.2020. Last invoice is HC01345 dated 01.01.2021-31.01.2021 (Annexure 4-page 210 Volume II of petition) there it is written as Running Bill then the due date is mentioned as 01.02.2021. The petitioner issued notice (Annexure 8 page 204 of petition) under the caption final notice before legal action to the respondent on 6.03.2021 granting time till 10.03.2021 to pay the outstanding amount…” The Adjudicating Authority held that the occurrence of default could be determined based on three possible dates: the last payment made on 13.11.2020, the due date specified in the last invoice as 1.02.2021, or the final opportunity date provided in the legal notice on 10.03.2021. However, it was concluded that the default did not occur on 09.01.2019, as the full outstanding amount was not due and payable on that date. Henceforth, it is imperative that a meticulous examination of the date be undertaken in order to ascertain the default date.
The aforementioned observation implies that the first invoice date does not coincide with the day of default, as the total outstanding balance does not become due and payable on the date of first invoice. Rather, the cumulative debt will be payable on the date of the final invoice, as all preceding invoices will have been issued by that time. Also, in the matter of TLG India Private Limited Vs. Puranik Builders Limited in CP(IB)-764/MB/2022, the Hon’ble NCLT Mumbai Bench on 17.03.2023 held that “…The date of default is not stated in Part-IV of the Application. However, after considering the pleading therein and details of the invoices annexed to the application, the date of default is determined as 25.10.2019 i.e., 30 days from the date of last invoice”.
Pursuant to the aforementioned ruling rendered by the Adjudicating Authority, it can be ascertained that the date of default shall be determined either as the date of the last invoice date issued, or if specified in the invoice, due date mentioned therein shall be deemed as the date of default.
Conclusion
Numerous judicial pronouncements have addressed the issue regrading determination of the date of default in the context of filing an application under Section 9 of the Code. Diverse conclusions have been reached by various Tribunals and Courts in this regard. Thereby, upon careful examination of the judgments rendered by the Tribunals and Courts, a recurring observation emerged that the inclusion of the default date in the application is a mandatory requirement. Failure to comply with this need, may lead to the rejection of the application. Although, the Hon’ble Supreme Court of India has not yet rendered a definite decision on issue herein discussed at large, but has clarified that a debt has to be considered owing if it is legally or actually payable. Thus, till the time there is no straight jacket formula for determining the date of default under Section 9 Application, it is evident that determining the date of default is fairly influenced by the facts of the case, which caters to further confusion and differences.
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