NCLT Chandigarh: Indemnity Obligation Can't Be Treated As Operational Debt For Lack Of Privity

An indemnity obligation refers to a commitment by one party (the indemnifier) to compensate another party (the indemnitee) for losses or damages incurred.

Operational debt, under the Insolvency and Bankruptcy Code (IBC), includes claims for goods or services provided. It also covers debts from employment and obligations to the government or local authorities.

Brief Facts:

Agarwal Foundries Private Limited (“Petitioner”) supplied TMT bars to the Empathy Infra & Engineering Pvt. Ltd. (“Third Party”) for the Nirvana Project in Pune, Maharashtra, under the assurance that POSCO E&C India Private Limited (“Respondent”) would act as a guarantor for the payment. This assurance was allegedly confirmed via email. Despite this, the third party failed to settle the outstanding amount which led the Petitioner to issue multiple demand notices to both the third party and the Respondent. The Petitioner argued that the Respondent committed to covering the third party's dues if it defaulted. Feeling aggrieved, the Petitioner approached the National Company Law Tribunal Chandigarh and filed a petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 for initiation of the Corporate Insolvency Resolution Process (CIRP) due to the default of the third party in paying Rs. 2,11,68,580/-.

The Respondent argued that the Petitioner was not an operational creditor as defined under IBC since the goods were supplied to the third party and not the Respondent. It argued that the definition of operational debt does not include guarantees which is different from financial debt. Additionally, the Respondent highlighted inconsistencies in the invoices submitted by the Petitioner and accused the Petitioner of submitting a false affidavit regarding the receipt of a reply to the demand notice.

The Petitioner argued that corporate guarantors are considered financial debtors and that CIRP can be initiated against them without first proceeding against the principal borrower. Conversely, the Respondent argued indemnity obligations under a guarantee do not apply to operational debts and stated that the petition against the Respondent, as a guarantor for operational debt, was not maintainable under Section 9 of IBC.

Observations by the NCLT:

The NCLT held that CIRP cannot be initiated against the Respondent because there was no privity of contract between the Petitioner and the Respondent. It noted that the Petitioner failed to provide substantial evidence or documentation to support its claim that the Respondent had guaranteed the payment on behalf of the third party. The email referred by the Petitioner, allegedly extending the assurance of payment, was sent by an employee without authority and didn't constitute a valid guarantee by the company. Additionally, the NCLT noted that the email was neither signed nor verified by the Respondent.

The NCLT held that it is necessary to have a documented agreement, signed and acknowledged by all involved parties, detailing the terms, conditions, liabilities, and claims. The absence of such documentation weakened the Petitioner's position.

The NCLT referred to the decision of the NCLAT in M.S. Jain vs. TVG Limited and Another, where it was held that indemnity obligations regarding a guarantee do not apply in cases of operational debt.

The NCLT held that the petition was not maintainable under Section 9 of the IBC due to the lack of privity of contract between the Petitioner and the Respondent. Therefore, the petition was dismissed.

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

Case Number: CP (IB) No. 109/Chd/Hry/2019

Advocate for the Petitioner: Mr. Anand Chhibbar, Senior Advocate Mr. Vaibhav Sahni, Advocate and Mr. Vivek Sethi, Advocate.

Advocate for the Respondent: Mr. Savar Mahajan, Advocate.

Date of Judgment: 06.06.2024.

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