Proceedings Under MSMED Act or Section 138 NI Act Do Not Constitute Pre-Existing Dispute Under Section 9 of IBC: NCLT Mumbai
Pranav B Prem
The National Company Law Tribunal (NCLT), Mumbai Bench, has held that the pendency of proceedings under the Micro, Small, and Medium Enterprises Development (MSMED) Act or Section 138 of the Negotiable Instruments Act, 1881, does not in itself amount to a pre-existing dispute under Section 9 of the Insolvency and Bankruptcy Code (IBC), 2016. The bench comprising Shri Prabhat Kumar (Technical Member) and Justice V.G. Bisht (Judicial Member) allowed the petition filed by M/s International Electricals, an operational creditor, for initiation of Corporate Insolvency Resolution Process (CIRP) against Aryan Electricals Pvt. Ltd.
Background
M/s International Electricals, a partnership firm engaged in the business of trading and selling electrical goods, supplied goods to the corporate debtor based on various purchase orders. In return, the corporate debtor issued five post-dated cheques as an assurance of payment. However, all five cheques were dishonoured—one due to insufficient funds and the rest due to being stale. The operational creditor claimed an amount of ₹4.42 crore (including ₹87.38 lakh as interest) as operational debt, with default alleged to have occurred on 09.03.2022.
The operational creditor initially approached the Micro and Small Enterprises Facilitation Council (MSEFC), Gujarat. The MSEFC, via notice dated 12.01.2023, directed the corporate debtor to clear the outstanding amount within 15 days. On non-compliance, the operational creditor filed a Section 9 petition before the NCLT on 12.12.2023.
Submissions by the Operational Creditor
The creditor submitted that goods were duly supplied along with manufacturers’ test certificates. The invoices were reflected in their GST returns, and lorry receipts bore signatures of representatives of the corporate debtor. It was further contended that the default was acknowledged through various communications, including emails and WhatsApp chats. They also submitted a breakdown of 22 invoices issued between 07.02.2022 and 02.05.2022 totaling ₹4.00 crore. The operational creditor argued that the demand notice under Section 8 of the IBC was validly issued, and the proceedings before the MSEFC or under Section 138 of the NI Act did not constitute a pre-existing dispute that could bar the insolvency application.
Submissions by the Corporate Debtor
The corporate debtor challenged the validity of the demand notice, stating that it claimed interest without any contractual basis or supporting documentation. It also contended that Mr. Gautam S. Jain, a partner in the creditor firm, was not authorized to issue the notice or file the petition.
They further alleged that the goods were not supplied as per purchase orders, that substandard goods were delivered, and that invoices lacked acknowledgments. The debtor also pointed to the prior legal notice sent on 29.12.2022 disputing supply and quality and the registration of a Section 138 complaint against them as indicators of a pre-existing dispute. It was also argued that the claim was time-barred and lacked acknowledgment under Sections 18 or 19 of the Limitation Act.
Findings of the Tribunal
The Tribunal rejected the claim of limitation, noting that the petition was well within the three-year period from the last date of default. It addressed the issue of authorization, observing that under the Indian Partnership Act, a partner has the authority to act on behalf of the firm in all matters related to its business, including initiation of insolvency proceedings.
The bench ruled that the absence of specific mention of interest in the purchase orders or invoices made the claim for ₹87.38 lakh as interest unsustainable, but the principal claim of ₹3.54 crore independently crossed the ₹1 crore threshold under Section 4 of the IBC.
On the issue of pre-existing dispute, the Tribunal concluded that neither the pendency of MSMED Act proceedings nor registration of a Section 138 NI Act complaint constituted a valid pre-existing dispute. Citing iValue Advisors Pvt. Ltd. vs. Srinagar Banihal Expressway Ltd [(AT) (Ins) No.1142 of 2019], it reaffirmed that proceedings before the MSEFC cannot automatically be treated as pre-existing disputes. Likewise, dishonour of cheques and the consequential Section 138 complaint did not undermine the existence of operational debt.
The Tribunal further noted that the corporate debtor had failed to provide any substantial evidence to support its claim of defective or unfulfilled delivery. The lorry receipts, third-party confirmations, GST records, and communications demonstrated that the goods had indeed been delivered.
Verdict
The NCLT held that the Section 9 application was complete, and the principal debt alone met the threshold requirement. The so-called dispute raised by the corporate debtor was unsupported and lacked material basis, rendering it a moonshine defence. Accordingly, the Tribunal allowed the application and admitted the corporate debtor into CIRP. Ms. Vineeta Maheshwari was appointed as the Interim Resolution Professional (IRP), and a moratorium under Section 14 of the IBC was imposed.
Appearance
For the Operational Creditor: Ms. Mily Ghoshal, Adv.
For the Corporate Debtor: Mr. Pulkit Sharma ,Adv.
Cause Title: M/s International Electricals v. Aryan Electricals Private Limited
Case No: CP (IB) 1211/MB /2023
Coram: Shri Prabhat Kumar [Member (Technical)], Justice V. G. Bisht (Retd) [Member (Judicial)]
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