NCLAT Delhi: Corporate Debtor Can't Escape Liability By Contending To Be Merely An Agent Of Principal

Background Facts:

Topaki Media Private Limited (“TMPL”), the Corporate Debtor, provided advertising services by acting as an agent for its clients. Videocon Industries Limited (“VIL”) utilized TMPL's services, and TMPL in turn sought the Rajasthan Patrika Private Limited (Respondent) to publish the advertisements in its newspapers.

Due to payment delays from VIL, an agreement was made for VIL to settle its debts directly with the Respondent through a barter system, exchanging appliances for the outstanding amounts. As the due amount remained unpaid, the Respondent demanded payment from TMPL and initiated a Corporate Insolvency Resolution Process (“CIRP”) under section 9 of the IBC.

Mukul Rajhans (Appellant), the Suspended Director of the Corporate Debtor, filed an appeal against NCLT Mumbai's Order dated 10.08.2023 admitting the CIRP application by the Respondent contending that it merely an agent of VIL and not liable to repay the outstanding amounts to the Respondent.

Contentions of the Respondent:

The Respondent argued that the Corporate Debtor acknowledges the unpaid invoices and outstanding dues without any dispute. Further, it issued purchase orders on its letterhead, and all invoices were addressed to TMPL without objection. Therefore, TMPL is liable for the outstanding debt.

Moreover, the arrangement to settle payments through VIL's appliances and products was organized by TMPL itself. TMPL regularly coordinated and facilitated these payments. An email from TMPL dated 18.09.2017, to the Respondent, indicated its inability to supply equipment against barter due to GST implications, showing TMPL's active involvement.

NCLAT Verdict:

The NCLAT Delhi dismissed the appeal and held that the Corporate Debtor cannot escape liability by contending that it is merely an agent and by taking recourse under Section 230 of the Indian Contract Act, 1872.

The Appellate Tribunal noted that TMPL issued the purchase orders on its letter head showcasing that it was responsible for paying the outstanding dues. Further, the barter agreement shows TMPL's active involvement in the payment arrangement.

Further, TMPL also proposed settling the accounts via barter instead of upfront payment and regularly coordinated the payments to the Respondent until issues with the new Goods and Services Tax (“GST”) regime arose. Thus, when the barter arrangement could not continue, the repayment responsibility fell solely on TMPL and it cannot evade its liability by attempting to shift it to VIL.

NCLAT also pointed out that after the insolvency admission orders against VIL, TMPL filed a claim of Rs. 23.35 crores as an Operational Creditor with VIL's Interim Resolution Professional, and this claim was fully admitted by VIL's Resolution Professional. Thus, TMPL cannot now transfer its liability to VIL.

NCLAT also placed reliance on Section 230 of the Indian Contract Act, 1872 which is read as follows:

230. Agent cannot personally enforce, nor be bound by, contracts on behalf of principal.—

In the absence of any contact to that effect an agent cannot personally enforce contracts entered into by him on behalf of his principal, nor is he personally bound by them.

Presumption of contract to contrary.—

Such a contract shall be presumed to exist in the following cases:—

(1) where the contract is made by an agent for the sale or purchase of goods for a merchant resident abroad;

(2) where the agent does not disclose the name of his principal;

(3) where the principal, though disclosed, cannot be sued.

The Appellate Tribunal observed that TMPL cannot invoke Section 230 of the Indian Contract Act, as the IBC proceedings are self-contained and govern the actions in such situations. Therefore, TMPL cannot evade liability by claiming that it was merely an agent and an agent cannot personally enforce or be bound by contracts made on behalf of a principal. Thus, TMPL cannot transfer its liability to VIL.

In conclusion, NCLAT observed that there is no tripartite agreement on record to outline the payment responsibilities and methods. Without such an agreement, the responsibility to repay the outstanding dues rests with TMPL. Therefore, NCLT Mumbai correctly admitted the CIRP petition against TMPL.

Case Title: Mukund Rajhans (Suspended Director of Topaki Media Private Limited) vs. Rajasthan Patrika Private Limited & Anr.

Case No.: Company Appeal (AT) (Ins.) No. 1398 of 2023

Counsel for Appellant: Mr. Vipul Wadhwa, Ms. Kashika Gera, and Mr. Vishal Binod, Advocates.

Counsel for Respondent: Mr. Anand Shankar Jha, Mr. Abhishek Tiwari and Mr. Sachin Mintri, Advocates.

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