NCLT New Delhi Rules, Insolvency Proceedings Can't Be Initiated By Operational Creditor When Complaints Regarding Defects Remain Unresolved
Pranav B Prem
The New Delhi Bench of the National Company Law Tribunal (NCLT) has held that insolvency proceedings under Section 9 of the Insolvency and Bankruptcy Code (IBC), 2016, cannot be initiated by an operational creditor where there exists a genuine, pre-existing dispute regarding the quality of goods and services. The Tribunal, comprising Shri Manni Sankariah Shanmuga Sundaram (Judicial Member) and Dr. Sanjeev Ranjan (Technical Member), dismissed the application filed by Schneider Electric India Pvt. Ltd. against Sarkun Solar Pvt. Ltd., citing unresolved defects in supplied equipment and sustained objections raised prior to issuance of the statutory demand notice.
Background
Schneider Electric India Pvt. Ltd. ("Operational Creditor") had filed a petition under Section 9 of the IBC seeking initiation of Corporate Insolvency Resolution Process (CIRP) against Sarkun Solar Pvt. Ltd. ("Corporate Debtor") for default in payment of ₹19.65 crore, including interest at 11% per annum. The claim arose out of nine agreements entered into between the parties on 20.06.2016 for civil works, erection, testing, commissioning, and supply of AC and DC electrical equipment for three solar power projects of 50 MW each, located in Bathinda and Mansa districts of Punjab.
The total contract value across these projects amounted to ₹91.56 crore. Despite completion of the works as alleged by Schneider Electric, payments were not released, prompting issuance of demand notices and an arbitration notice. However, initial notices were undelivered. A final demand notice was successfully served via email on 11.07.2022.
Corporate Debtor’s Response
The Corporate Debtor contested the claim on multiple grounds, notably:
The application was barred by limitation, with the alleged defaults occurring between 2014 and 2017, while the petition was filed only in August 2022.
A long-standing pre-existing dispute existed regarding defective equipment, including faulty inverters and system design issues, which were raised as early as February 2017.
Emails dated 08.06.2017, 24.06.2017, and several others up to 2018 consistently pointed out persistent technical defects.
Despite repeated communication, the Operational Creditor failed to address these issues and instead suspended warranty services and abandoned the site.
The Corporate Debtor also challenged the reliance placed by the applicant on a letter dated 25.06.2018, arguing that it did not contain any acknowledgment of debt but merely requested service support.
In rebuttal, Schneider Electric argued:
That the limitation was saved under Section 18 of the Limitation Act based on acknowledgment in the 25.06.2018 letter.
That no communication alleging defects was made after this letter, and the dispute raised was a mere afterthought.
That the demand notice was duly served via email and no notice of dispute was issued in response within the statutory 10-day period.
That the contractual milestones, not the invoices, governed the payment terms and all such milestones were achieved.
Tribunal’s Findings
The Tribunal, after examining the submissions and records, made the following observations:
The Corporate Debtor had raised quality and performance issues regarding the supplied equipment much prior to the issuance of the demand notice. This included documented concerns about faulty inverters, oil leakage, and other system design issues communicated via multiple emails.
The Operational Creditor had suspended its warranty obligations and left the project site without formal handover, aggravating operational losses for the Corporate Debtor.
The evidence clearly established a long-standing and genuine dispute between the parties. The Tribunal emphasized that under Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. [(2018) 1 SCC 353], even a plausible dispute suffices to render a Section 9 petition non-maintainable.
The Tribunal also relied on Sabarmati Gas Ltd. v. Shah Alloys Ltd. (2023), reiterating that existence of a pre-existing dispute—irrespective of its merits—is enough to warrant dismissal at the threshold.
On the issue of limitation, the Tribunal noted that even assuming a 2018 acknowledgment, the petition was still filed beyond three years without sufficient explanation or a valid extension under law, apart from the COVID-19 exclusions.
Verdict
The Tribunal concluded that the insolvency process cannot be used as a substitute for a recovery mechanism, especially when there exists a substantive dispute on record predating the statutory demand notice. It held: “The Respondent/Corporate Debtor has raised multiple issues regarding defective supplies… This conduct reflects an attempt to misuse the insolvency process for recovery of a contested claim, contrary to the objectives of the IBC.” Accordingly, the application filed by Schneider Electric India Pvt. Ltd. was dismissed as non-maintainable under Section 9 of the IBC. No costs were imposed.
Appearance
For the Applicant: Ms. Geetali Hazarika, Adv.
For the Respondent: Mr. Sumesh Dhawan, Ms. Vatsala Kak, Mr. Raghav
Cause Title: Schneider Electric India Private Limited V. M/s Sarkun Solar Private Limited
Case No: CP (IB) No. 778 (ND)/ 2022
Coram: Shri Manni Sankariah Shanmuga Sundaram [Hon’ble Member (Judicial)], Dr. Sanjeev Ranjan [Hon’ble Member (Technical)]
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