When There Is No Privity Of Contract Between Operational Creditor And Corporate Debtor, Application U/S 9 Of IBC Cannot Be Admitted: NCLAT

Brief Facts:

The matter pertains to a railway contract awarded by MB Power (Madhya Pradesh Ltd.) (Respondent), in relation to its project located in Jaithari, Anuppur District, Madhya Pradesh. Rahee Jhajharia E to E JV (Appellant) had filed a petition under Section 9 of the Code for the recovery of an operational debt amounting to Rs. 16,08,00,000 (Rupees Sixteen Crores Eight Lakhs) which was rejected on the ground that there was no privity of contract between the parties.

The present appeal has been filed against the above order.

Contentions:

The Appellant submitted that the Respondent as the beneficiary of the project actively participated in its execution and issued various communications. The Letter of Award issued on 29 June 2012 by Hindustan Thermal acknowledges the ongoing relationship between the Appellant and the Respondent reinforcing the existence of a contract and referring to the previous communication that has taken place between the parties.

It was further submitted that the Respondent, being a part of the same corporate group, remains responsible for the debt incurred under the contract, regardless of the involvement of a subsidiary.

Lastly, it was submitted that the Respondent-Corporate Debtor-MB Power was acting as a guarantor for releasing of the payment of Hindustan Thermal in terms of the work completion certificate issued with its co-signature indicating the outstanding amount. Therefore, it cannot be said that there was no privity of contract between the Appellant and the Respondent.

Per contra, the Respondent submitted that the corporate debtor and Hindustan Thermal are distinct entities. The corporate debtor neither issued a purchase work/order to the Appellant nor received any invoices for the alleged dues.

It was further submitted that a dispute exists between the Appellant and Hindustan Thermal and issuance of section 8 demand notice and subsequent application under section 9 of the code were merely an afterthought which was done upon realizing that proceedings could not be initiated against Hindustan Thermal-EPC.

Lastly, it was submitted that the Appellant does not fall in the category of Operational Creditor (OC) of the Corporate Debtor as per the definition provided under Section 5(20) r/w 3(23) of the Code. The Appellant is a Special Purpose Vehicle (SPV) and SPV is an association of the person and does not fall within the definition of the OC as provided in the code.

Observations:

The Tribunal noted that a demand notice under section 8 of the Code cannot be deemed valid if based on dues of a sister concern or group company. In the present case, invoices were addressed to Moser Baer Construction Pvt. Ltd. and not to the corporate debtor therefore on the basis of this demand notice, an application under section 9 of the code cannot be accepted.

It further added that separately, around the same time on 04.12.2018 the Appellant issued a fresh Demand Notice to the Respondent-MB Power for the same 92 invoices, which was refuted by the Respondent on 20.12.2018.

The Tribunal noted that initially, the Appellant issued the demand notice under section 8 of the code to the EPC Thermal which was later withdrawn. The Appellant again sent a demand notice to the Respondent for the same invoices for which the notice was issued to the EPC Thermal.

Based on the above, it said that therefore there is a force in the contention of the Respondent that sending demand notice to the Respondent was an afterthought because in a reply to the demand notice issued to the EPC Thermal, the EPC Thermal had raised various issues and counter claimed the amount to the tune of Rs. 20.10 crores from the Appellant.

The Tribunal held that in light of above discussion, it can be said that there is no privity of contract between the Appellant and the corporate debtor. Furthermore, issues related to quality of work executed by the Appellant had already been raised by the EPC Thermal.

The Tribunal further said that the Adjudicating Authority rightly held that there was no privity of contract between the Appellant and the Respondent as invoices and work orders were linked to Hindustan Thermal EPC. Just because the Respondent attempted to reconcile or settle between the Appellant and Thermal Power EPC and the work completion was signed by the Respondent does not make the Respondent liable for the outstanding amount.

The Tribunal concluded that an application under section 9 of the code cannot be entertained when there is no creditor-debtor relationship between the Appellant and the Respondent. The facts clearly establish that no invoices were raised against the corporate debtor, no payments were made by it therefore no privity of contract exists between the parties.

Case Title:Rahee Jhajharia E to E JV Versus MB Power (Madhya Pradesh Ltd.)

Case Number: Company Appeal (AT) (Insolvency) No. 2279 of 2024

Judgment Date: 26/03/2025

For Appellant : Mr. Abhijeet Sinha, Sr. Advocate with Mr. Rakesh Kumar, Mr. Ankit Sharma and Ms. Preeti Kashyap, Advocates

Click Here To Read/Download The Order