NCLAT Affirms Rejection of Section 9 Application for CIRP Due to Lack of Privity of Contract and Time-Barred Claims
- REEDLAW
- Oct 16, 2024
- 3 min read
The NCLAT affirmed the rejection of the Section 9 application for the Corporate Insolvency Resolution Process (CIRP) due to the lack of privity of contract and the claims being time-barred.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench led by Justice Ashok Bhushan (Chairperson) and Technical Members Mr. Barun Mitra and Mr. Arun Baroka reviewed an appeal and observed that the Appellant failed to establish any privity of contract with the Respondent, rendering the claim for operational debt unsubstantiated and time-barred under the Limitation Act, 1963, thereby justifying the rejection of the Section 9 application for initiation of Corporate Insolvency Resolution Process (CIRP). The court emphasized that the provisions of the Insolvency and Bankruptcy Code, 2016, should not be misused to coerce payments from solvent entities when no legitimate debt exists.
In a recent decision by the National Company Law Appellate Tribunal (NCLAT), the Appellant, M/s Agarwal Foundries Pvt. Ltd., challenged an order from the Adjudicating Authority (NCLT, Chandigarh Bench-I) dated June 6, 2024, which had rejected their application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) for the initiation of the Corporate Insolvency Resolution Process (CIRP) against POSCO E&C India Private Limited, the Respondent. The Appellant claimed that it supplied TMT Bars to Empathy Infra & Engineering Pvt. Ltd., a contractor of the Respondent, and sought outstanding payments for these supplies.
The Appellant argued that the Respondent had acknowledged the debt through replies to Demand Notices sent in July 2017, asserting that this acknowledgement should prevent the claim from being considered time-barred. They maintained that the Respondent had a contractual obligation as a guarantor for payments due from Empathy, citing email communications that purportedly confirmed the Respondent's assurance to cover any defaults. However, the Respondent refuted these claims, stating there was no direct supply of goods or services between the two parties and that no valid contract of guarantee existed. Furthermore, the Respondent contended that the Appellant's claim was indeed time-barred, asserting that the limitation period should be calculated from the date of default rather than from the issuance of Demand Notices.
Upon review of the evidence, the NCLAT determined that the Appellant had not demonstrated any privity of contract with the Respondent. The emails presented did not constitute a clear agreement, and the invoices cited were issued by third parties rather than the Appellant itself.
Consequently, the NCLAT upheld the Adjudicating Authority’s decision, concluding that the Appellant did not qualify as an Operational Creditor and that the claim for operational debt was unsubstantiated, resulting in the dismissal of the appeal.
The judgment underscored the Respondent's denial of any liability and characterized the Appellant's allegations of debt as false and concocted. It was noted that the Section 8 Demand Notice failed to establish the requisite elements of a valid debt claim. The Respondent's reply described the notice as an abuse of legal process, aimed at coercing payment for a claim related to transactions that did not involve them. Furthermore, the NCLAT highlighted the relevance of the Supreme Court's ruling in B.K. Educational Services Private Limited v. Parag Gupta and Associates, REEDLAW 2018 SC 10542, reinforcing that proceedings under Section 9 of the IBC are subject to the Limitation Act, 1963. The Appellant's claim was found to be time-barred since the default date was established as August 28, 2015, while the Section 9 application was filed on February 11, 2019, exceeding the three-year limitation period.
The NCLAT reiterated the core objectives of the IBC, which include promoting entrepreneurship, maximizing asset value, and balancing the interests of stakeholders. The court noted the Appellant's pattern of filing multiple Section 9 applications against the Respondent and Empathy, indicating potential misuse of IBC provisions. The initial Demand Notice was sent on July 27, 2017, and subsequent actions suggested a malafide intent to extort payments from a solvent company. Ultimately, the NCLAT found the Adjudicating Authority's rejection of the Appellant's Section 9 application to be justified and dismissed the appeal, ordering both parties to bear their own costs.
Mr. Arijit Prasad, Sr. Advocate with Mr. Rajat Chaudhary, Advocate represented the Appellant.
Mr. Savar Mahajan, Ms. Pooja Mahajan and Ms. Komal Abrol, Advocates appeared for the Respondent.
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