On September 10, 2024, the National Company Law Appellate Tribunal (“NCLAT”) in M/s Agarwal Foundries Private Limited v. POSCO E&C India Private Limited, [Company Appeal (AT) (Insolvency) No. 1492 of 2024], held that applications under section 9 of the Insolvency and Bankruptcy Code, 2018 (“IBC”) cannot be filed for recovery for money and the same amounts to misuse of the provisions under IBC.

Facts:

The appellant, M/s Agarwal Foundries Private Limited, was a supplier of TMT bars and the respondent, POSCO E&C India Private Limited, sought quotation for supply of the same to its contractor, Empathy Infra & Engineering Private Limited. Thereafter, the bars were supplied to the contractor and invoices were raised against which the payment remained outstanding.

Subsequently, the appellant issued a demand notice alongside an application under section 9 of the IBC against the respondent, on the ground that the respondent was a guarantor qua the dues of the contractor. The application was rejected by the National Company Law Tribunal and thus, the present appeal was filed before the NCLAT.

Submissions by Appellant:

The appellant contended that it was the operational creditor of the respondent since goods were supplied by the appellant to the contractor on the instructions of the respondent. It was further claimed that respondent had undertaken to assume the role of a guarantor if the contractor fails to pay the dues, as evidenced from various e-mails exchanged between the appellant and the respondent. Thus, the liability of the respondent to pay the outstanding dues of the contractor was absolute and unconditional.

Further, it was contended that the application was within the limitation period of three years since the demand notice was issued on July 27, 2017 and the application was filed on February 11, 2019.

Submissions by Respondent:

The respondent contended that the appellant did not provide any goods directly to the respondent and thus, it cannot be the operational creditor. Further, it was submitted that there was privity of contract between the parties and correspondences in the form of unauthorized e-mails cannot form the basis of a valid contract.

As regards the limitation period, it was contended that the same should be counted from the date of default instead of the date of issuance of the demand notice or the date of its reply. Further, it was asserted that the application was filed for recovery for money and viewed it as an attempt to illegally extort monies from the respondent.

Issues:

1. Whether the appellant is an operational creditor of the respondent under section 5(20) of the IBC?
2. Whether the claim of the appellant is an operational debt under section 5(21) of the IBC?
3. Whether the claim of the appellant is time-barred under the Limitation Act, 1963?

Observations by NCLAT:

At the outset, the NCLAT held that the term ‘operational debt’ under section 5(21) of the IBC pertains to four categories, i.e., goods, services, employment and Government dues. Further, as per Rule 5(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 read with Regulation 7(2)(b)(i) of the Insolvency and Bankruptcy (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 state that an operational creditor can issue a notice pertaining to an operational debt either through a demand notice or an invoice for the supply of goods and services with the corporate debtor.

Issue 1:

The NCLAT looked into the e-mails and minutes of meetings of a tripartite agreement exchanged between the respondent and the appellant. As regards the emails, the NCLAT held that the same cannot be treated as an admission or acknowledgement of any guarantee to the liability of its contractor and thus, there was no reflection of a clear meeting of minds and consent of all parties qua the guarantee. As regards the minutes of meetings, it was held that the same was not signed by the parties. Thus, there being no privity of contract between the parties, it was held that the appellant cannot be treated as an operational creditor of the respondent.

Issue 2:

The NCLAT held that the key requirement of an operational debt is that it must relate to the provision of goods or services, without specifying who the supplier or receiver should be. Further, it was held that invoices attached to the section 9 application were issued by some third party named Machine & Chemical Industries and GSR Marketing instead of the appellant. Though the appellant claimed that the third party was their local distributor, they failed to provide any evidence to establish that any such agreement was consented by either the respondent or their contractor. Thus, the twin fact that the goods were supplied by a third party to the contractor and the invoices for the same were raised against the contractor, led the NCLAT to conclude that the appellant cannot claim the debt as an operational debt.

Issue 3:

The NCLAT held that the appellant’s claim was time-barred, since the limitation period of three years under the Limitation Act, 1963 is to be counted from the date of default, i.e., August 28, 2015 and the application under section 9 of the IBC was filed on February 11, 2019. 

Author`s view:

The NCLAT noted that the appellant had been filing and subsequently withdrawing multiple applications under section 9 of the IBC against the respondent and the contractor thereby, suggesting that mala-fide intention on part of the appellant. The NCLAT expressed strong dissatisfaction towards such misuse of provisions of IBC, emphasizing that the objective of the IBC is insolvency resolution and not recovery of money.

Please find attached a copy of the judgement.

This update has been contributed by Aayush Kumar (Partner) and Anoushka Goel (Associate).

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