The National Company Law Appellate Tribunal has clarified that a minimum guaranteed royalty obligation under a technical agreement, even without accompanying invoices, can constitute an operational debt under Section 9 of the Insolvency and Bankruptcy Code, provided the default is admitted and exceeds the statutory threshold. This ruling reinforces the principle that the Adjudicating Authority must not overstep its limited mandate to determine the existence and quantum of undisputed debts.
Background & Facts
The Dispute
The dispute arose from a Technical Guidance Agreement (TG Agreement) executed on 14.09.2012 between Lyka Labs Ltd. (Appellant) and Modi Lifecare Industries Ltd. (Respondent). Under Clause 1D of the agreement, the Respondent agreed to pay the Appellant a minimum royalty fee of ₹1 Crore per annum for the period ending 2013, and ₹2 Crores per annum for the period from 1st December 2013 to 30th November 2014, whichever was higher between the fixed amount and 5% of total sales value. The agreement was valid for five years from its execution.
Key Facts
- The TG Agreement did not mandate the issuance of invoices for the minimum guaranteed royalty payments.
- On 02.08.2013, the parties agreed to modify payment terms: (a) ₹60,00,000 of the ₹1 Crore due by 30.11.2013 was deferred and payable in instalments between 01.12.2013 and 30.11.2015; (b) minimum royalty for 01.12.2013 - 30.11.2014 was fixed at ₹1,30,00,000; (c) minimum royalty for 01.12.2014 - 30.11.2015 was fixed at ₹2,30,00,000.
- The Appellant sent multiple demand letters: 18.05.2017, 28.06.2017, and 25.07.2017, claiming outstanding dues of ₹84,72,740.
- The Respondent, in its letter dated 31.07.2017, acknowledged a liability of approximately ₹63,00,000 towards royalty dues for FY 2013 - 14.
- The Respondent’s letter dated 30.09.2017 did not dispute the existence of the debt but claimed royalty was payable only on actual sales, contradicting the TG Agreement.
- The Appellant issued a demand notice in Form-3 under Rule 5 of the IBC on 10.10.2017, without annexing invoices, as none were contractually required for minimum royalty.
- The Company Petition under Section 9 was filed on 27.02.2018.
Procedural History
- 14.09.2012: Execution of Technical Guidance Agreement.
- 02.08.2013: Modified payment terms agreed upon in writing.
- 18.05.2017, 28.06.2017, 25.07.2017: Appellant’s demand letters.
- 31.07.2017: Respondent acknowledges ₹63,00,000 liability.
- 30.09.2017: Respondent’s reply disputing basis of calculation but not existence of debt.
- 10.10.2017: Demand notice issued in Form-3 without invoices.
- 27.02.2018: Section 9 petition filed before NCLT, Ahmedabad.
- 20.11.2019: NCLT dismissed petition.
- 16.03.2023: NCLAT remanded the matter for fresh consideration.
- 22.02.2024: NCLT again dismissed petition on grounds of missing invoices and alleged dispute.
- 22.07.2024: Appeal filed before NCLAT.
- 19.05.2026: Judgment delivered by NCLAT.
The Parties' Positions
The Appellant contended that the TG Agreement created a fixed, non-contingent royalty obligation, and the Respondent’s acknowledgment of ₹63 lakhs established an undisputed operational debt. The Respondent argued that the debt was disputed due to conflicting claims, that invoices were mandatory under Rule 5, and that the claim was in the nature of unliquidated damages under the Indian Contract Act.
Relief Sought
The Appellant sought admission of the Section 9 petition, initiation of Corporate Insolvency Resolution Process (CIRP), and recovery of ₹5,95,04,537 as operational debt. Alternatively, it sought recognition of the admitted ₹63,00,000 as a valid operational debt.
The Legal Issue
Can a minimum guaranteed royalty obligation under a contract, which does not require issuance of invoices, constitute an operational debt under Section 9 of the IBC, even in the absence of annexed invoices in the demand notice, where the corporate debtor has admitted a liability exceeding ₹1 lakh?
Arguments Presented
For the Appellant
The Appellant relied on Consolidated Constructions Consortium Ltd. v. Hitro Energy Solutions Pvt. Ltd. and Neeraj Jain v. Cloud Walker Streaming Technologies Pvt. Ltd. to argue that Form-3 under Rule 5 does not mandate annexation of invoices where the debt arises from a contract that does not require them. It emphasized that the Respondent’s letter dated 31.07.2017 admitted a liability of ₹63,00,000, which exceeds the statutory threshold. The Appellant contended that the NCLT erred in treating the dispute over quantum as a dispute over existence, and that the IBC is not a forum for adjudicating contractual disputes.
For the Respondent
The Respondent argued that the claim was unliquidated damages under Section 73 of the Indian Contract Act, not an operational debt. It claimed that the Appellant’s inconsistent demands (₹63 lakhs, ₹84 lakhs, ₹5.95 crores) indicated a disputed liability. It further contended that Rule 5 required invoices to be annexed, and that the absence of invoices rendered the demand notice defective. It also invoked limitation under Section 238A read with Article 137 of the Limitation Act, asserting that claims for 2012 - 2015 were time-barred.
The Court's Analysis
The NCLAT undertook a rigorous statutory interpretation of Section 9 and Rule 5 of the IBC. It held that the existence of an operational debt under Section 3(21) is established when it arises from a contract, and the requirement to annex invoices under Rule 5 is not absolute. The Tribunal observed:
"The technical guidance agreement did not cast any liability upon the appellant to raise invoices upon the respondent for making it liable to pay the minimum royalty fees to the appellant."
It distinguished Agarwal Vineers on the ground that the debt in that case arose from invoices, whereas here, the debt arose from a fixed contractual obligation. The Tribunal rejected the Respondent’s argument that the claim was unliquidated damages, noting that the Appellant’s reference to Sections 37 and 73 of the Contract Act did not alter the nature of the debt, which was crystallized under the TG Agreement.
The Court further held that the Respondent’s acknowledgment of ₹63,00,000 in its letter dated 31.07.2017 constituted an admission of debt, and that a dispute over quantum does not equate to a dispute over existence. The Tribunal emphasized:
"The primary issue which arises for consideration in the adjudication of a Section 9 petition is whether or not there has been a default on an operational debt in excess of Rs 1 lakh."
It dismissed the limitation argument, noting that the debt remained outstanding and was acknowledged in 2017, well within the limitation period preceding the petition filed in 2018.
The Verdict
The Appellant succeeded. The NCLAT set aside the impugned order dated 22.02.2024 and directed the Respondent to deposit ₹63,00,000 within 30 days of the judgment. In the event of non-payment, the Adjudicating Authority was directed to initiate Corporate Insolvency Resolution Process under Section 9 of the IBC. The appeal was disposed of, and all interim applications were closed.
What This Means For Similar Cases
Minimum Royalty Obligations Are Operational Debts
- Practitioners may now initiate CIRP under Section 9 where a contract imposes a fixed minimum royalty, even if invoices are not issued.
- The absence of invoices is not fatal if the debt is contractually fixed and admitted.
- Operational creditors must ensure the demand notice clearly references the contractual basis of the debt.
Admission of Debt Trumps Dispute Over Quantum
- A corporate debtor’s acknowledgment of a specific amount, even if lower than claimed, establishes an undisputed debt for Section 9 purposes.
- Disputes over calculation methodology or higher claims do not negate the existence of a debt admitted in writing.
- Courts will not permit respondents to use technicalities to evade insolvency when liability is acknowledged.
Form-3 Compliance Is Functional, Not Formalistic
- Rule 5 permits submission of documents proving the existence of debt; invoices are not mandatory if the contract does not require them.
- The NCLAT’s reliance on Consolidated Constructions and Neeraj Jain establishes a binding precedent for non-invoice-based operational debts.
- Operational creditors should retain all contractual documents and written acknowledgments to support Form-3 filings.
