Filing Section 9 Applications For Money Recovery Instead Of Insolvency Resolution Is Abuse Of Process: NCLAT Principal Bench

The bench held that:

“We need to be mindful that no stakeholder takes any undue benefit of the provisions of the IBC. Interestingly, we find that the Appellant has been filing multiple Section 9 applications either against the Respondent or against the Empathy. The first Demand Notice under Section 8 of IBC was issued to the Respondent on 27.07.2017. The Appellant sent another notice on 11.10.2017 and followed it up with Section 9 application which was however withdrawn on 08.06.2018. Thereafter, the Appellant sent another Demand Notice on 17.07.2018 to Empathy and filed a Section 9 application against them which too was withdrawn on 15.10.2018. Subsequently on 24.10.2018, the Appellant sent a fresh Demand Notice to Empathy which was followed by a Section 9 application filed on 11.02.2019. This shows the malafide motive of the Appellant to keep the Section 9 pot boiling so as to arm-twist the Respondent which was otherwise a solvent company to illegally extort monies from them. Thus, the Section 9 application was not filed for the purpose of insolvency resolution but for recovery of money owed to them by Empathy fromthe Respondent. Such behaviour on the part of the Appellant amounts to misuse of the provisions of the IBC and is strongly deprecated.”

Brief Facts:

The matter pertained to an appeal filed under Section 61 of the Insolvency and Bankruptcy Code, 2016 by M/s Agarwal Foundries Private Limited (Appellant) against the impugned order passed by the National Company Law Tribunal, Chandigarh Bench-I. The NCLT rejected the Section 9 application filed by the operational creditor (Appellant) seeking the initiation of the Corporate Insolvency Resolution Process (CIRP) against the Respondent, POSCO E&C India Private Limited. The Appellant sought to initiate CIRP and alleged that despite supplying TMT Bars to Empathy Infra & Engineering Pvt. Ltd. (the contractor for the Nirvana Project), the payment for the supplied goods remained outstanding. The Appellant claimed that the Respondent requested the supply and assured payment on behalf of Empathy thereby acting as a guarantor. When the payment was not made, multiple demand notices were issued, followed by the Section 9 application. The NCLT, however, dismissed the application which made the Appellant to approach the NCLAT .

The Appellant argued that the NCLT erroneously held its claim to be time-barred. The Appellant contended that since a demand notice was issued on July 27, 2017 and acknowledged by the Respondent, this acknowledgment should be considered an admission of debt, making the Section 9 application filed on February 11, 2019 well within the three-year limitation period. Moreover, it argued that the NCLTT wrongly concluded that there was no privity of contract between the Appellant and the Respondent. The Appellant further argued that the Respondent assumed the role of a guarantor through various communications, including emails, and that a signed agreement was not necessary to establish a valid contract.

Observations by the NCLAT:

The NCLAT referred to Section 5(20) and Section 5(21) of the IBC which defines an Operational Creditor as someone to whom an operational debt is owed, including those who have been legally assigned such debt. Similarly, an operational debt is described as a claim related to the provision of goods, services, employment, or statutory dues payable to government authorities.

The NCLAT noted that the Appellant did not provide any direct documentary evidence or formal agreement with the Respondent, which would establish the latter's guarantee of payment on behalf of Empathy, the party to whom goods were supplied. The Appellant argued that such a formal agreement was unnecessary and that the contractual relationship could be inferred from email correspondences. However, the NCLAT found that the emails relied upon by the Appellant did not conclusively establish the existence of such a guarantee. Notably, the email dated 26.06.2015, which the Appellant pointed to as evidence of the Respondent's guarantee, was challenged by the Respondent as unauthorized as being sent by an employee without the necessary authority to bind the company. The NCLAT did not delve into the issue of whether the email was a result of misrepresentation, as suggested by the Respondent, but it held that the contents of the email did not reflect a clear and mutual agreement between all the parties involved. Further, the tripartite meeting minutes presented by the Appellant lacked signatures.

The NCLAT, in reviewing the email, noted that this correspondence only demonstrated the Respondent's warning to Empathy regarding the payment schedule. This did not constitute an admission of liability or an acknowledgment of any guarantee. Therefore, the NCLAT held that the Appellant failed to establish any contractual obligation or privity of contract between the Appellant and the Respondent.

Addressing the issue of operational debt, the NCLAT observed that such a debt must relate to the provision of goods or services, without specifying who the supplier or receiver should be. In this case, there was no contractual relationship between the Appellant and the Respondent, and the invoices attached to the Section 9 application were issued by third parties, not the Appellant. The goods were supplied to Empathy, and not the Respondent, and the Appellant failed to provide any evidence that these third parties were local distributors acting on the Appellant's behalf. Consequently, the NCLAT held that the Appellant could not claim the debt as an operational debt under Rule 5(1) of the Insolvency and Bankruptcy Rules.

The NCLAT further noted that the Appellant's claim was time-barred, with the date of default being 28.08.2015 and the Section 9 application filed on 11.02.2019, well beyond the three-year limitation period established by the Limitation Act, 1963.

The NCLAT expressed concern over the Appellant's repeated filings of Section 9 applications against both the Respondent and Empathy observing a pattern of conduct that suggested malafide intent. It held that the Appellant's actions appeared to be aimed at pressuring the Respondent, a solvent entity, to recover monies owed by Empathy. The NCLAT held that such misuse of the IBC provisions was unacceptable and noted that the IBC's objective is to resolve insolvency issues not to facilitate debt recovery through coercion.

Therefore, the appeal was dismissed.

Case Title: M/s Agarwal Foundries Private Limited vs POSCO E&C India Private Limited

Case Number: Company Appeal (AT) (Insolvency) No. 1492 of 2024

For Appellant : Mr. Arijit Prasad, Sr. Advocate with Mr. Rajat Chaudhary, Advocates.

For Respondent : Mr. Savar Mahajan, Ms. Pooja Mahajan and Ms. Komal Abrol, Advocates.

Date of Judgment: 10.09.2024

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