Corporate Debtor Not Responsible For Non-Supply Of Materials By Third Party Being An Agent: Mumbai NCLT

Brief Facts

The operational creditor filed a petition under section 9 of the IBC for the amount to the tune of Rs. 3.63 crores. The operational creditor paid advance amount to the corporate debtor to supply the materials. The dispute emerged when the corporate debtor failed to deliver the materials. Thereafter, the operational creditor advanced further payment to the corporate debtor on February 5, 2022 despite not receiving the materials as per previous agreements. A criminal complaint was also filed by the operational creditor against the corporate debtor.

Contention of Both Parties

It was submitted by the operational creditor that amount to the tune of Rs. 3.63 crores was given to the corporate debtor for supply of goods. However, in spite of payment, the corporate debtor failed to deliver the agreed upon goods. It was further argued that this amount constituted an unpaid operational debt for which a petition under section 9 of the IBC is maintainable as there was no pre-existing dispute related to the claimed amount. Additionally, it was submitted that multiple reminders were sent to the corporate debtor but no materials was supplied.

Per Contra, It was submitted by the corporate debtor, there was a pre-existing dispute with respect to the claimed amount which was raised subsequent to the demand notice served by the operational creditor. It was further argued that it was not directly responsible for non-supply of materials as the corporate debtor was merely acting an agent between the operational creditor and Orbit Electromech India Pvt., the actual supplier. It was argued that the advance payment received from the operational creditor was forwarded to the actual supplier and it was a failure of the actual supplier to supply the materials which caused the issue. It was also argued that the operational creditor had been informed of this arrangement and the corporate debtor acted in good faith throughout the transaction.

The corporate debtor demonstrated a signed agreement date January 17, 2022 in which it was agreed between the corporate debtor and the actual supplier that in case of non-supply of goods by the actual supplier, entire advanced payment shall be refunded. It is contention of the corporate debtor that despite being conscious of the fact that materials were not supplied earlier, the operational creditor continued advancing payment.

NCLT's Analysis

The NCLT agreed with the contention of the corporate debtor and observed that it was merely acting as an agent between the operational creditor and the actual supplier. The agreement which was signed on January 27, 2022 clearly showed responsibilities of both the parties including advanced payment to be refunded by the actual supplier in case the materials were not supplied to the operational creditor. The tribunal observed as under:

“Prima-facie, these facts leads us to conclusion that the Corporate Debtor was merely acting as an agent between the Operational Creditor and Orbit Electromech India Pvt. Ltd. and the advance paid to the Corporate Debtor was recoverable from Orbit Electromech India Pvt. Ltd. in case of failure to supply goods”.

The NCLT further noted that 7 consignments which were supposed to have been dispatched by the actual supplier were not received by the operational creditor. Despite this, the operational creditor advanced further payment of Rs. 2.5 crores to the corporate debtor on February 5, 2022 which demonstrated utter negligence on its part. The tribunal observed as under:

“The Corporate Debtor has raised the issue of non-reconciliation of accounts and negligence on part of the Operational Creditor to have delivery from Orbit Electromech India Pvt. Ltd. updated in its accounts before making further advance to further supplies from Orbit Electromech India Pvt. Ltd”.

The NCLT further stated that there was a pre-existing dispute in relation to the debts as concluded by the Hissar Police Authorities after investigating the complaint filed by the operational creditor against the corporate debtor. The Police indicated in its report that this criminal case had to be resolved first before any outstanding debts can be claimed. It was held as under:

“The categorical finding of Hissar Police authorities on the basis of statement of Mr. Vijay Kumar Jha (M/s Nirav Metals) clearly demonstrates that the amounts, in question, were to be paid by the Corporate Debtor after recovery thereof from Orbit Electromech India Pvt. Ltd”.

The NCLT concluded that:

“In view of these facts, we are of considered view that there exists primafacie dispute and this Tribunal can not adjudicate upon such dispute in the present proceedings. Hence, the debt in question can not be said to be undisputed debt. Accordingly, the present petition is not maintainable and liable to be dismissed”.

Conclusion

The NCLT concluded that the corporate debtor was not responsible for non-supply of materials by a third party. It was merely acting as an agent. In addition to that the tribunal held that there was already a pre-existing dispute over the debts in the form of a criminal case. Accordingly, the present petition under section 9 of the IBC against the corporate debtor was dismissed as it was not maintainable.

Case Title: Rajendra Kedia (J.M. Steels) vs. Nirav Metals Pvt. Ltd.

Case Reference: CP (IB) No. 186/MB/2024

Court: National Company Law Tribunal, Mumbai Bench

Judgment Date : 3/10/2024

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