Repeated Section 9 IBC Applications Indicate Misuse Of IBC To “Arm-Twist” Solvent Company For Extortion: NCLAT

Background Facts:

The Appellant, Agarwal Foundries Pvt. Ltd., supplied TMT Bars to Empathy Infra & Engineering Pvt. Ltd. ("Empathy"), the contractor of the Respondent, POSCO E&C India Pvt. Ltd. ("POSCO"), for the Nirvana Project.

POSCO had sought the supply of TMT Bars via an email dated 10.06.2015, and the Appellant sent various invoices, but the payments were not made by Empathy. POSCO allegedly acted as a guarantor for Empathy's dues and issued multiple assurances via email, but no payments were made. The Appellant issued demand notices under Section 8 of the IBC on 27.07.2017, 11.10.2017, 17.07.2018, and 24.10.2018 to POSCO, alleging default in payment.

The NCLT dismissed the Section 9 application filed on 11.02.2019 for initiating Corporate Insolvency Resolution Process (CIRP) against POSCO as being time-barred and due to the absence of privity of contract.

Arguments:

By the Appellant:

• The 27.07.2017 demand notice constituted an acknowledgment of debt, which reset the limitation period. Thus, the Section 9 application filed on 11.02.2019 was within the statutory limitation of three years.
• POSCO, through various emails, undertook to act as a guarantor and ensure payments if Empathy failed to make them. Therefore, POSCO should be liable for the operational debt owed by Empathy.
• Since the goods and services were supplied by the Appellant to Empathy which was hired by the Respondent for its project, the Appellant was the Operational Creditor of the Respondent.
• A signed agreement is not the only pre-requisite of a valid contract; even documents like e-mails etc. can also be seen to infer the existence of a contract.

By the Respondent:

• The Appellant had neither provided any goods nor any services to the Respondent directly and therefore cannot claim to be an Operational Creditor of the Respondent.
• There was no legally valid contract of guarantee executed between the Appellant and the Respondent and unauthorized e-mails cannot be the foundation of a contract of guarantee.
• The Respondent did not fall within the definition of a "Corporate Guarantor" under Section 5(5-A) of the IBC. There is no provision whereby guarantee is covered in the definition of "Operational Debt" under Section 5(21) of IBC. Hence, application under Section 9 of the IBC is not maintainable against a guarantor of an Operational Debt.
• The limitation period should be calculated from the date of default (when the cause of action arose) and not from the date of the demand notice. Thus, the claim was time-barred.
• The Appellant's Section 9 application was an attempt to misuse the insolvency process to recover dues from Empathy and "arm-twist" POSCO, which is a solvent company.

Observations by the Tribunal:

The Tribunal observed that the emails dated 10.06.2015 and 24.06.2015 did not constitute an offer from the Respondent for a guarantee and that the third email dated 26.06.2015 did not confirm any guarantee agreement. Moreover, the minutes from a meeting dated 19.10.2015, which recorded a payment schedule, did not bear the signatures of the parties. Due to this deficiency, the minutes were discarded as proof of a guarantee agreement. The Tribunal also noted that the email dated 30.10.2015 from the Respondent to Empathy, which discussed actions if payments faltered, was not an acknowledgement of liability. Thus, the Tribunal agreed with the Adjudicating Authority that the Appellant failed to produce any valid documentation or agreement confirming a guarantee of payment by the Respondent.

The Tribunal further observed that for a claim to qualify as an operational debt, it must have a nexus with the provision of goods or services. The Tribunal found no such nexus between the Appellant and the Respondent. The invoices attached to the Section 9 application were issued by third parties and not the Appellant. Thus, the Tribunal found no basis for claiming an operational debt.

The Tribunal agreed with the Adjudicating Authority's conclusion that the claim was time-barred as it was filed beyond the three-year limitation period.

The Tribunal found that the Appellant has been filing multiple Section 9 applications either against the Respondent or against Empathy. It observed:

“This shows the malafide motive of the Appellant to keep the Section 9 pot boiling, so as to arm-twist the Respondent, a solvent company, to illegally extort monies from them.”

The Tribunal concluded that the Section 9 application was not aimed at insolvency resolution but was instead a tactic for recovering money owed by Empathy to the Respondent. Such conduct, it held, amounts to a misuse of the IBC and was strongly condemned.

Therefore, the appeal was dismissed.

Case Title: M/s Agarwal Foundries Private Limited vs. Posco E&C India Pvt. Ltd.

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

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

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

Date of Judgment: 10.09.2024