The National Company Law Appellate Tribunal (NCLAT) resolved a critical ambiguity in insolvency proceedings by holding that advance payments made for undelivered goods constitute valid operational debt under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC), even when disputed damages are excluded, and that service of demand notice via private courier complies with statutory requirements upon proof of delivery. The judgment underscores that the IBC's threshold of ₹1 crore is satisfied when the core liability for advance payments exceeds this amount, irrespective of collateral disputes over damages or transportation costs.
Background & Facts
The Commercial Transactions
The Appellant, M/s Identity Science Company Ltd., a Japanese entity, entered into two sales contracts with the Respondent, M/s Sonal Plasrub Industries Private Limited, an Indian company. First, on 18.06.2018, the Appellant ordered 140,000 kgs of 1-Bromo Butane (NBB) at USD 3.22 per kg for delivery at Shanghai-China between July 2018 and January 2019. The Respondent delivered 40,000 kgs but a leakage of 1,622 kgs occurred during transit of the next consignment, for which the Appellant paid USD 16,766 to Qingdao Seaport on 05.03.2019. Second, on 26.03.2019, the Appellant ordered 200,000 kgs of Hydro Bromic Acid 48% (HBr) for delivery at Qingdao, China by 30.04.2019, with 100% advance payment of Japanese Yen 62,40,000 made by the Appellant. Despite full advance payment, neither the NBB nor the HBr consignments were delivered by the Respondent.
The Payment Default and Demand Notice
Following non-delivery, the Appellant issued a Demand Notice on 21.02.2020 claiming ₹1,12,37,645.54 as operational debt, comprising advances for undelivered NBB (USD 84,060) and HBr (JPY 62,40,000). The notice was dispatched via FedEx courier and delivered to the Respondent's registered office on 27.02.2020, as evidenced by tracking records. The Respondent admitted receipt of the advance payments in its email dated 12.07.2019, undertaking to repay the amounts but failing to provide any repayment schedule or make payment.
Procedural History
- 21.02.2020: Demand Notice issued by Appellant claiming operational debt of ₹1,12,37,645.54
- 27.02.2020: Demand Notice delivered via FedEx to Respondent's registered office
- April 2021: Petition filed under Section 9 IBC as C.P. (IB) No. 693/MB/2021 before NCLT Mumbai Bench-V
- 06.09.2024: Impugned Order passed by NCLT Mumbai Bench-V dismissing the petition
- September 2024: Present Appeal filed before NCLAT challenging the impugned order
- 17.09.2026: Judgment delivered by NCLAT Division Bench
The Parties' Positions
The Appellant contended that the Demand Notice was validly served, the operational debt exceeded ₹1 crore even after excluding the disputed USD 16,766 for damages, and no genuine pre-existing dispute existed regarding the advance payments which the Respondent admittedly agreed to repay. The Respondent countered that FedEx service violated Rule 5 of IBC Rules, the operational debt fell below ₹1 crore when damages were excluded, and a genuine pre-existing dispute existed over transportation damages and alleged wrongful deductions by the Appellant.
Relief Sought
The Appellant sought to set aside the impugned order dated 06.09.2024, direction to the NCLT to initiate Corporate Insolvency Resolution Process (CIRP) against the Respondent, and liberty to deposit the operational debt amount before CIRP initiation to avoid proceedings.
The Legal Issue
The central question was whether the dismissal of an insolvency petition under Section 9 of the IBC was justified when: (a) the demand notice was served via private courier (FedEx) with proof of delivery, (b) the operational debt exceeded ₹1 crore after excluding disputed damages for transportation, and (c) the Respondent admitted liability to repay advance payments for undelivered goods without establishing a genuine pre-existing dispute regarding such admitted liability.
Arguments Presented
For the Appellant
The Appellant relied on the principle that the object of Section 8 and Rule 5 of IBC Rules is to put the corporate debtor on notice of the claim, which was satisfied by proof of delivery via FedEx despite non-compliance with prescribed modes, citing G. Shivramkrishna Vs. Isgec Covema Ltd. & Anr. (2020 SCC OnLine NCLAT 909) and Piya Puri Vs Mr. Debashish Nanda RP of Venta Realtech Pvt. Ltd. (2022 SCC OnLine NCLAT 4006). It argued that the operational debt exceeded ₹1 crore as the advance payments for undelivered NBB (USD 84,060 ≈ ₹60,64,327 at 72.11 USD/INR) and HBr (JPY 62,40,000 ≈ ₹39,90,480 at 0.6395 JPY/INR) totalled ₹1,00,54,807, and even after excluding the disputed USD 16,766 (≈ ₹12,09,000), the threshold was met when calculated using the exchange rate prevalent on the date of the Demand Notice (21.02.2020). The Appellant further contended that the dispute over damages was separate from the admitted liability to repay advances, citing the Respondent's email undertaking repayment.
For the Respondent
The Respondent argued that FedEx service violated Rule 5 which mandates specific modes (registered post, speed post, or email to key personnel), rendering the notice invalid and the petition non-maintainable. It claimed the operational debt was below ₹1 crore as the amount received (₹97,19,589) failed to meet the threshold, and the Appellant inflated the claim by adding disputed damages (USD 16,766) and applying a belated exchange rate (February 2020) instead of the rate on payment dates (June 2019). The Respondent relied on Sharif-Ud-Din v. Abdul Gani Lone ((1980) 1 SCC 403) and DLF Limited v. Konkar Generators and Motors Limited ((2025) 1 SCC 343) to assert that the IBC is not a debt recovery tool and that genuine pre-existing disputes over transportation damages defeated Section 9 proceedings.
The Court's Analysis
The NCLAT began by addressing the service of demand notice, holding that while Rule 5 prescribes specific modes, the object of Section 8 is to ensure the corporate debtor receives notice of the claim and opportunity to dispute. The Court stated: "The material on record shows proof of dispatch, proof of delivery and a tracking number. The Demand Notice was issued to the registered office address of the Respondent and was delivered on 27.02.2020. The Respondent has not disputed the correctness of its registered office address." It further emphasized that "The fact that the Appellant, being a company based in Japan, used a private courier service cannot by itself defeat the proceedings when effective delivery of the Demand Notice is established. The object of notice under law is to make aware of the proposed actions likely to be taken; here, the said purpose was served, as the Respondent did get knowledge of the notice because of the admitted service of notice effected upon them." This rejected the Respondent's technical objection, aligning with precedents where substance overrode procedural hyper-technicality.
On the threshold issue, the Court applied the exchange rate prevailing on the date of the Demand Notice (21.02.2020: 1 USD = 72.11 INR, 1 JPY = 0.6395 INR) as guided by Forasol versus ONGC (1984 (SUPP) (SC) 263), which permits conversion at the rate on the date when the amount became due or when the suit is filed. Calculating the dues: NBB advance (USD 84,060 × 72.11 = ₹60,64,327) plus HBr advance (JPY 62,40,000 × 0.6395 = ₹39,90,480) yielded ₹1,00,54,807. Even excluding the disputed USD 16,766 (≈ ₹12,09,000), the operational debt remained ₹88,45,807. However, the Court noted the Appellant's calculation showed the amount exceeded ₹1 crore as on 20.02.2022 (date of demand application), satisfying the threshold independently of the disputed damages. The Court clarified that it was unnecessary to crystallize the damages claim as operational debt since the core advance payments alone met the threshold.
Regarding pre-existing disputes, the Court distinguished the dispute over transportation damages (USD 16,766) from the admitted liability to repay advances. It held: "Such correspondence regarding the disputed damages does not, in the facts of the present case, constitute a genuine pre-existing dispute in relation to the principal amount of the advances which the Respondent admittedly agreed to repay. The dispute regarding damages is separate from the admitted liability to return the advance received for goods which were never supplied." The Court found the Respondent's reliance on S.S. Engineers vs. Hindustan Petroleum Corporation Limited misplaced, as the present case involved admitted receipt of advances and undertaking to repay, unlike cases where debts were genuinely disputed. The Court concluded that the Respondent failed to establish a genuine pre-existing dispute regarding the advance payments, satisfying Section 9 requirements.
The Verdict
The Appellant succeeded in full. The NCLAT set aside the impugned order dated 06.09.2024 passed by the National Company Law Tribunal, Mumbai Bench-V in C.P. (IB) No. 693/MB/2021. It directed the Adjudicating Authority to pass the necessary order for initiation of Corporate Insolvency Resolution Process against the Respondent under Section 9 of the Insolvency and Bankruptcy Code, 2016, within fifteen days from the date on which a copy of this order is placed before it. The Respondent was granted liberty to deposit or pay the amount due to the Appellant (₹1,12,37,645.54) within the aforesaid period and before the order under Section 9 is issued, in which event the Adjudicating Authority would take the payment into consideration and the Section 9 order need not be issued. No order as to costs was passed.
What This Means For Similar Cases
Service of Demand Notice: Substance Over Technicality
Practitioners must ensure proof of delivery (tracking, acknowledgment) when using non-prescribed courier services for Section 8 notices, as the object of notice - putting the debtor on actual knowledge of the claim - prevails over strict modal compliance. This expands service options beyond registered post or email, particularly for cross-border transactions where international couriers offer reliable tracking.
Operational Debt Threshold: Advance Payments for Undelivered Goods Qualify
The core liability for advance payments made against undelivered goods or services constitutes operational debt under Section 9 IBC, even if collateral disputes exist over damages, transportation costs, or quality issues. Creditors should isolate the admitted advance amount for threshold calculation, using the exchange rate prevalent on the date of demand notice or suit filing, as guided by Forasol principles.
Pre-existing Distinction: Separating Disputed Damages from Core Liability
A genuine pre-existing dispute under Section 9 must relate to the principal debt sought to be recovered, not to separate collateral claims. Where a debtor admits liability to repay advances (as evidenced by correspondence or undertaking) but disputes ancillary matters like damages, the latter does not defeat insolvency proceedings. Creditors should obtain clear admissions of repayment liability to negate pre-existing dispute defenses.
