NCLAT Sets Aside NCLT Dismissal Over Post-Covid Invoice Defaults in IBC Proceedings

Introduction

In a ruling that reinforces the importance of meticulous invoice-by-invoice scrutiny in insolvency applications, the National Company Law Appellate Tribunal (NCLAT), Principal Bench in New Delhi, has set aside an order passed by the National Company Law Tribunal (NCLT), New Delhi Bench-III. The decision, delivered on January 7, 2024, in Company Appeal (AT) (Insolvency) No. 502 of 2024 , criticizes the NCLT for dismissing a Section 9 application under the Insolvency and Bankruptcy Code, 2016 (IBC), without considering defaults on invoices that fell outside the Covid-19 exclusion period mandated by Section 10A. This oversight led to the erroneous rejection of the operational creditor's claim, despite the post-exclusion defaults exceeding the Rs 1 crore threshold under Section 4.

The appellant, M/s Airtech Airconditioning, represented by proprietor Arshad Shah, sought initiation of the Corporate Insolvency Resolution Process (CIRP) against the respondent, Parnika Commercial & Estate Private Limited, for unpaid HVAC and firefighting services across three projects. The NCLAT bench, comprising Justice Ashok Bhushan (Chairperson) and Barun Mitra (Member, Technical), who authored the judgment, emphasized that tribunals must not apply the Section 10A bar—a temporary suspension on fresh insolvency filings for defaults between March 25, 2020, and March 24, 2021—blanketly to all claims in multi-invoice petitions.

As reported in legal updates following the judgment, the appellate tribunal held that the NCLT Delhi failed to consider invoices whose dates of default fell outside the Covid-19 excluded period, thereby vitiating the dismissal. This case arises amid ongoing post-pandemic economic recovery efforts, where many operational creditors in sectors like construction and services grapple with delayed payments. The ruling not only restores the Section 9 application but also signals a procedural safeguard for creditors with mixed-timeline debts, potentially influencing how insolvency pleas are framed and adjudicated in similar scenarios. By remanding the matter with limitations, the NCLAT ensures focused proceedings, balancing debtor protections with creditor rights under the IBC framework.

Case Background

The dispute traces back to 2019 when M/s Airtech Airconditioning, an operational creditor specializing in heating, ventilation, and air conditioning (HVAC) services, was engaged by Parnika Commercial & Estate Private Limited, the corporate debtor, for three distinct government-related projects: Vanijya Bhawan in New Delhi, DRDO in Delhi, and IIT Mumbai. Separate work orders were issued for each, leading to a series of running account bills and invoices raised by Airtech for services rendered, including firefighting installations.

Payments were to become due within 15 days of the corporate debtor receiving funds from its clients. However, delays mounted, culminating in outstanding dues totaling Rs 8.23 crore plus 18% interest. Notably, invoices for the DRDO and IIT projects dated back to 2020-2021, with defaults occurring during the Section 10A exclusion period—a measure introduced via notifications dated September 24, 2020, and December 22, 2020, to shield distressed entities from insolvency triggers amid the Covid-19 crisis. In contrast, the Vanijya Bhawan project invoices, dated March 29, 2022, and July 13, 2022, had defaults on April 14, 2022, and July 29, 2022—clearly post-exclusion and amounting to Rs 2.36 crore after adjusting partial payments.

On October 21, 2022, Airtech issued a demand notice under Section 8 of the IBC, prompting a reply from Parnika on October 31, 2022, denying dues and alleging performance deficiencies. Undeterred, Airtech filed the Section 9 application on February 22, 2023, before the NCLT New Delhi. The tribunal dismissed it on December 18, 2023, citing the Section 10A bar based solely on three pre-exclusion invoices from the other projects, ignoring the Vanijya Bhawan claims. This led to the appeal under Section 61, heard in hybrid mode with advocates Vipul Ganda for the appellant and Bhupesh Narula for the respondent.

The timeline underscores the Covid-19's lingering shadow on commercial disputes: while the pandemic disrupted cash flows across projects starting in 2020, the Vanijya Bhawan work progressed to completion and inauguration on June 23, 2022, highlighting divergent timelines within the same contractual relationship. This background illustrates a common post-Covid challenge—entangled debts from phased projects—where the IBC's default-centric mechanism demands precise temporal analysis.

Arguments Presented

Appellant's Contentions Represented by counsel including Mr. Vipul Ganda, the appellant argued that the NCLT erred in rejecting the Section 9 application by applying Section 10A uniformly, without segregating the Vanijya Bhawan invoices, which independently satisfied the Rs 1 crore threshold under Section 4. They emphasized that defaults are to be assessed per invoice, with the two Vanijya bills (totaling Rs 2.36 crore) falling post-March 24, 2021, thus unaffected by the Covid bar.

To rebut claims of pre-existing disputes under Section 9(5)(ii), Airtech highlighted the project's timely completion, defect rectification per the snag list, issuance of a handover note on October 8, 2022 (acknowledged by Parnika), and a completion certificate from NBCC (the upstream contractor). They pointed to Parnika's availment of Input Tax Credit (ITC) on the March 9, 2022, and July 13, 2022, invoices, visible on the GST portal, as implicit admission of services rendered. No disputes were raised until the Section 8 notice, and earlier letters (December 31, 2020, and February 10, 2021) pertained only to the IIT project. Post-notice disputes and the respondent's arbitration initiation were dismissed as afterthoughts to thwart the petition. During hearings, Airtech offered to limit claims to the two Vanijya invoices.

Respondent's Contentions Counsel Mr. Bhupesh Narula countered by asserting pre-existing disputes, evidenced by Parnika's own demand notice on October 19, 2022—preceding Airtech's—seeking refund of Rs 1.43 crore for alleged over-payments and over-billing. They labeled Airtech's Section 8 notice as frivolous, noting unsigned and manipulated invoices lacking Parnika's endorsement. Performance issues included unexplained delays, midway abandonment, and incomplete work, forcing Parnika to engage alternative contractor Global Aircon at higher rates for time-bound projects, incurring losses.

A reconciliation statement was submitted, showing Airtech owed Rs 3.40 crore plus interest due to excess receipts. Parnika accused Airtech of raising duplicate invoices for work done by Global Aircon. Communications on delays were cited, and the pending arbitration under the work order was argued to render the Section 9 application infructuous. They urged dismissal, claiming the entire claim, including Vanijya, stemmed from disputed, pre-Covid engagements.

These arguments pitted creditor recovery against debtor defenses, with the crux on whether disputes were bona fide or tactical.

Legal Analysis

The NCLAT's reasoning centered on the NCLT's procedural lapse in evaluating the Section 9 application's particulars under Part-IV, which clearly listed six invoices, including the two post-Section 10A Vanijya ones. The tribunal quoted the impugned order's narrow focus on three 2020-2021 invoices (defaults November 6, 2020; November 27, 2020 (twice); March 3, 2021), all within the exclusion, leading to a blanket non-maintainability finding. This, the NCLAT held, was a "blunder," as Section 10A prohibits only applications for defaults in the specified period, not those arising later, even if linked to ongoing contracts.

While no precedents were explicitly cited, the decision aligns with IBC's foundational principle of default as the trigger for CIRP (Section 7-9), interpreted individually per transaction to avoid injustice. Section 10A, a temporary measure extended via MCA notifications to mitigate pandemic-induced insolvencies, does not retroactively or expansively bar valid post-period claims. The NCLAT distinguished between mixed claims: where sub-claims exceed the default threshold independently, the application survives, provided no genuine pre-existing dispute taints it. Here, the Rs 2.36 crore from Vanijya invoices met Section 4's limit, rendering the dismissal unsustainable.

On disputes, the NCLAT reserved opinion for remand but implicitly questioned their timing—raised post-Section 8 and arbitration filed later—echoing IBC jurisprudence that disputes must exist before the demand notice and be supported by evidence, not mere assertions. This differentiates genuine operational conflicts (e.g., abandonment losses via alternative contracting) from "afterthought" tactics to evade liability. The ruling promotes evidentiary rigor: GST records, completion certificates, and ITC claims as proof of debt acknowledgment.

In essence, the analysis clarifies that Section 10A's scope is temporal and claim-specific, not holistic, preventing its misuse to shield post-Covid defaults. For legal professionals, it mandates pleadings with granular breakdowns, akin to how courts under Section 138 NI Act scrutinize cheque dates. This could refine IBC practice, reducing appeals from hasty dismissals and fostering equitable resolutions in service-heavy sectors like HVAC, where Covid delays blurred timelines.

Key Observations

The NCLAT's judgment is replete with pointed observations underscoring procedural fairness and statutory fidelity. Key excerpts include:

• On the NCLT's oversight: "The Adjudicating Authority blundered was that it clearly failed to take note of the two invoices of the Vanijya Bhawan Project, the date of which invoices and their date of defaults unambiguously fell beyond the period covered by Section 10-A of IBC."

• Reiterating the claim's viability: "Since the date of default arising out of these two invoices fall beyond the Section 10-A period, the Section 9 application could not have been dismissed by the Adjudicating Authority on grounds of Section 10-A."

• Directing focused remand: "The matter is remanded back to the Adjudicating Authority to be considered again in accordance with law with the caveat that the claim of operational debt shall remain confined only to the two invoices relating to the Vanijya Bhawan Project dated 29.03.2022 and 13.07.2022."

• On broader neutrality: "We also add here that we have not expressed any opinion on the contentions raised by both parties with respect to pre-existing dispute qua the Vanijya Bhawan Project."

These quotes encapsulate the tribunal's emphasis on precision, ensuring tribunals do not overlook viable claims amid Covid-era complexities.

Court's Decision

The NCLAT allowed the appeal, finding "merit" in Airtech's challenge, and set aside the impugned NCLT order dated December 18, 2023. The Section 9 application, C.P. (IB) No. 126/ND/2023, was restored and remanded to the NCLT for fresh consideration "in accordance with law," strictly limited to the two Vanijya Bhawan invoices (March 29, 2022, and July 13, 2022). No opinion was ventured on pre-existing disputes, leaving that for the lower tribunal. No costs were imposed.

This outcome practically revives Airtech's Rs 2.36 crore claim, potentially leading to CIRP admission if disputes are unsubstantiated on remand. For the respondent, it narrows defenses to the specified invoices, possibly expediting resolution via arbitration or settlement.

Implications are far-reaching: Future cases with hybrid defaults will require invoice segregation, deterring blanket Section 10A rejections and promoting access to justice for post-Covid creditors. In practice, this may spur more appeals or refined filings, easing recovery in delayed sectors while upholding IBC's debtor rehabilitation ethos. As economies stabilize, such rulings ensure the Code's tools remain adaptable, preventing pandemic-era suspensions from indefinitely haunting legitimate claims.