When There Is No Privity Of Contract Between Operational Creditor And Corporate Debtor, Application U/S 9 of IBC Cannot Be Admitted, Rules NCLAT
Pranav B Prem
In a significant ruling, the National Company Law Appellate Tribunal ("NCLAT"), New Delhi, comprising Justice Ashok Bhushan (Chairperson), Mr. Arun Baroka (Technical Member), and Mr. Barun Mitra (Technical Member), has held that an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 ("IBC") cannot be admitted in the absence of privity of contract between the Operational Creditor and the Corporate Debtor. The judgment emphasizes that when invoices are addressed to a sister concern rather than the Corporate Debtor itself, it unequivocally reflects the absence of a debtor-creditor relationship, thereby rendering the application under Section 9 unsustainable.
Background of the Case
The appeal arose from a petition filed under Section 9 of the IBC by Rahee Jhajharia E to E JV (Appellant) against MB Power (Madhya Pradesh) Ltd. (Respondent), seeking recovery of Rs. 16.08 crores as operational debt. The application was rejected by the Adjudicating Authority on the ground that there was no privity of contract between the parties.
The dispute pertains to a railway contract related to MB Power's project in Jaithari, Madhya Pradesh. The invoices in question, however, were raised against Hindustan Thermal EPC (a sister concern of MB Power) and not against MB Power itself.
Appellant's Contentions
The Appellant argued that:
The Respondent (MB Power) was actively involved in the project and issued several communications acknowledging the Appellant's work. The Appellant relied on a Letter of Award dated June 29, 2012, which referenced the relationship between the parties.
Since MB Power and Hindustan Thermal EPC are part of the same corporate group, the Respondent should be held liable for the operational debt arising from the project.
The Respondent acted as a guarantor by co-signing the work completion certificate that indicated the outstanding amount. Thus, the Respondent cannot claim the absence of privity of contract.
Respondent's Contentions
In response, MB Power contended that:
MB Power and Hindustan Thermal EPC are distinct legal entities. The corporate debtor (MB Power) neither issued a work order nor received invoices from the Appellant.
The Appellant's operational debt claim arises against Hindustan Thermal EPC, not MB Power. Thus, no creditor-debtor relationship exists between the Appellant and MB Power.
The issuance of a Section 8 demand notice to MB Power was an afterthought. Initially, the Appellant had served a demand notice to Hindustan Thermal EPC, which was later withdrawn after realizing that insolvency proceedings could not be initiated against them.
NCLAT's Observations and Findings
The NCLAT, after examining the facts and arguments, made the following crucial observations:
On Privity of Contract: The Tribunal held that an application under Section 9 of the IBC requires the existence of a creditor-debtor relationship. It observed: "A demand notice under Section 8 of the Code cannot be deemed valid if based on dues of a sister concern or group company." In this case, the invoices were raised on Hindustan Thermal EPC and not on MB Power, making the demand notice invalid as against MB Power.
On the Validity of Demand Notices: The Tribunal noted that the Appellant initially issued a Section 8 demand notice to Hindustan Thermal EPC, which was later withdrawn. Subsequently, a fresh demand notice was issued to MB Power for the same invoices. This sequence raised doubts about the bona fides of the Appellant's claim. The NCLAT remarked: "Sending a demand notice to the Corporate Debtor was an afterthought because in reply to the demand notice issued to Hindustan Thermal EPC, various issues and a counterclaim of Rs. 20.10 crores were raised."
The Tribunal rejected the argument that MB Power, as part of the same corporate group, was liable for the debt. It emphasized the principle of corporate separateness, observing that: "Just because the Corporate Debtor attempted to reconcile disputes between the Appellant and Hindustan Thermal EPC does not make the Corporate Debtor liable for the outstanding amount."
On Operational Creditor Status: The Tribunal also addressed the argument regarding the status of the Appellant as an Operational Creditor. It observed that since invoices were never raised against MB Power, the Appellant cannot qualify as an Operational Creditor in relation to MB Power under Section 5(20) read with Section 3(23) of the IBC.
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Verdict
Upholding the Adjudicating Authority's decision, the NCLAT concluded that the Appellant failed to establish the existence of a debtor-creditor relationship between itself and the Respondent. Therefore, the application under Section 9 of the IBC was rightly rejected. The Tribunal emphatically held: "An application under Section 9 of the IBC cannot be entertained when there is no creditor-debtor relationship between the parties. The facts clearly establish that no invoices were raised against the Corporate Debtor, no payments were made by it, and thus no privity of contract exists."
Appearance
For Appellant: Mr. Abhijeet Sinha, Sr. Advocate with Mr. Rakesh Kumar, Mr. Ankit Sharma and Ms. Preeti Kashyap, Advocates
For Respondent: None
Cause Title: Rahee Jhajharia E to E JV V. MB Power (Madhya Pradesh Ltd.)
Case No: Company Appeal (AT) (Insolvency) No. 2279 of 2024
Coram: Justice Ashok Bhushan [Chairperson] , Mr. Arun Baroka [Member (Technical)], Mr. Barun Mitra [Member (Technical)]
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