CIRP Can Be Initiated Against The Corporate Debtor Despite Principal-Agent Relationship Between CD And Ultimate Client: NCLT Mumbai

Background Facts

S.A. Consultants & Forwarders Pvt. Ltd. (“Operational Creditor”) had rendered logistics services to the clients of the Prime Cargo Movers & Logistics Pvt. Ltd. (“Corporate Debtor”) during May 2019 on its instructions. The Operational Creditor had raised invoices for the same amounting to Rs. 31,59,604 against which the Corporate Debtor assured payments while explaining the delay on account of uncontrollable circumstances. However, on 6 December 2019, the Corporate Debtor denied the liability to pay.

The Operational Creditor filed an application under section 9 of the Code to initiate Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor.

The Corporate Debtor contended the maintainability of the application by arguing that it was merely an agent and once the invoices of the Corporate Debtor were paid by M/s. Rivaa Fashion, Aurum Fabrics and Clothing, Heartbury Garments and N.K. Exports (“Principal”), it would in turn make the payments to the Operational Creditor. It further argued that there was no direct liability on the Corporate Debtor even if the payments were delayed as the Corporate Debtor was only a bona fide agent and so it cannot be held liable for the acts of its Principal as per section 230 of the Indian Contracts Act, 1872.

NCLT Verdict

The NCLT noted that the Corporate Debtor had relied upon an NCLT order dated 19 January 2022 in C.P No. 1952/IBC/MB/2019 whereby it was held that the Operational Creditor should have taken recourse to legal remedies against the client to whom the services were actually provided and not against the agent and the application as against the agent was dismissed. Further, it also noted the judgment relied upon by the Corporate Debtor which was passed by the Bombay High Court in the matter of The Indian Seamless Metal Tubes Limited vs. Hina Shipping & Forwarding (M) Private Limited whereby also it was held that in view of Section 230 of the Contract Act, the suit would not be maintainable against the defendant who was merely an agent of the disclosed principal.

However, the NCLT rejected the contentions raised by the Corporate Debtor by holding that even if the Corporate Debtor was acting as an agent of the disclosed principal, the same would not be of any consequence so far as the Operational Creditor was concerned. It distinguished the case laws relied upon by the Corporate Debtor on facts and held that they would have been relevant had the Corporate Debtor been acting as an agent of the Operational Creditor itself.

It held that the Corporate Debtor had been availing services from the Operational Creditor directly for its clients and had further been separately charging its parties through invoices after adding its own expenses, charges etc. Therefore it could not evade liability by claiming that he was only an agent of its clients.

The NCLT noted that there was no privity of contract between the Operational Creditor and the stated parties and therefore the Operational Creditor could not be made to pursue its remedies against such third parties.

In conclusion, the NCLT rejected the contentions raised by the Corporate Debtor and admitted the application filed by the Operational Creditor thereby initiating CIRP proceedings against the Corporate Debtor.

Case Title: S.A. Consultants & Forwarders Pvt. Ltd. v. Prime Cargo Movers & Logistics Pvt. Ltd.

Case No.: C.P. (IB) 1049/MB/2020

Counsel for the Applicant: Adv. Pervinder Chatrapati and Adv. Avinash Bhati

Counsel for the Respondent: Adv. Hamza Lakhani

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