Raw Material Advances Made During Insolvency To Keep the Company Running Are CIRP Costs: NCLT Delhi

The National Company Law Tribunal (NCLT) at New Delhi has held that advances paid for the supply of raw material under a job work arrangement can be treated as corporate insolvency resolution process costs if they were necessary to keep the corporate debtor functioning as a going concern during CIRP.

A coram of President Justice Ramalingam Sudhakar and Technical Member Ravindra Chaturvedi was dealing with a dispute between Teneron Limited, a supplier of aluminium raw material, and Metenere Limited, an aluminium products manufacturer undergoing insolvency. The tribunal dealt with whether amounts paid during CIRP for continuing production could be treated as CIRP costs.

It observed, “the supply of material by the Applicant to CD were critical to the business of the CD and it was kept as a going concern only because of the Applicant's initiative to get the finished goods through CD.”

Therefore, it noted that even if the payments were treated merely as advances, they would still fall within the scope of CIRP costs.

Teneron Limited had been supplying aluminium raw material to Metenere Limited under a job work arrangement, with Metenere processing the material into finished products. After Metenere was admitted to CIRP on September 25, 2020, Teneron continued with the arrangement. It supplied material, paid for operations and upkeep of the plant, and later even entered into a fresh job work agreement in June 2024 to ensure continuity of production.

Teneron said that during the CIRP period it paid around Rs 224.31 crore to the corporate debtor. In return, it received finished aluminium products valued at about Rs 217 crore. It claimed that the balance amount remained unpaid and arose from several issues. These included refunds of excess payments, proceeds from the sale of dross, amounts charged twice for goods that were rejected and reprocessed, the cost of consumables supplied to the plant, Gram Panchayat taxes paid on the company's behalf, and unpaid lease rentals for equipment used during operations.

Put together, these claims added up to about Rs 24 crore, which Teneron sought to have treated as CIRP costs.

After reconciliation, the resolution professional admitted dues of Rs 3.32 crore for the CIRP period but disputed their classification as CIRP costs.

Teneron argued that these amounts spent were essential for keeping Metenere's plant operational during CIRP and therefore qualified as CIRP costs payable in priority. It sought immediate release of the admitted Rs 3.32 crore and a declaration that its broader claim also fell within CIRP costs.

The resolution professional and the monitoring committee opposed the plea. They contended that the payments were only advances against job work services rendered by the corporate debtor.

They maintained that these were contractual adjustments and not expenses incurred to run the corporate debtor as a going concern, and that issues relating to material ownership and other contractual disputes lay outside the tribunal's jurisdiction.

The tribunal, however, rejected this position insofar as the classification of the admitted dues as CIRP costs was concerned.It noted that Metenere's core business was the processing of raw material supplied by Teneron into finished aluminium products and that this activity continued during CIRP only because Teneron kept supplying material and funds.

The tribunal observed that “Even accepting the case of the RP, that the raw material supplied by the Applicant is to be regarded merely as an advance towards processing of finished goods, such advance would nonetheless constitute a supply to keep the CD as a going concern, which squarely falls within the ambit of Corporate Insolvency Resolution Process (CIRP) cost.”

It also clarified that the existence of a running account or the nature of the job work arrangement could not take away the statutory priority accorded to CIRP costs.

Since the resolution professional had admitted Rs 3.32 crore as payable for the CIRP period, the tribunal directed that the amount be treated as a CIRP cost and be paid in priority. The remaining contractual claims can, however, be resolved separately in accordance with law.

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