IBC: NCLAT Rejects CIRP Application and Penalises Operational Creditor Due to Malicious Intent

Introduction

The National Company Law Appellate Tribunal, New Delhi (‘NCLAT’), in the matter of Manishaas Infratecho Solutions Pvt. Ltd. v. Bhonu Hulshi Real Estate Pvt. Ltd.[i], decided a dispute between Manishaas Infratecho Solutions Pvt. Ltd. – the operational creditor (‘OC’) and Bhonu Hulshi Real Estate – the corporate debtor (‘CD’). The key issues before the NCLAT included determining whether an operational debt existed that had become due and payable, whether there was a default in payment, and whether any pre-existing dispute between the parties could be established

Facts

• The National Company Law Tribunal, Kolkata Bench (NCLT), the adjudicating authority (‘AA’), had dismissed the application filed by the OC under s. 9 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’). It imposed a penalty of Rs. 1 lakh. The OC thus filed an appeal.

• The OC/Appellant had received a work order from the CD for civil construction and miscellaneous work related to the Bhonu Hulshi Nilaay Project.

• The OC completed various civil and electrical works and raised invoices amounting to Rs. 4.26 crore, of which Rs. 2.05 crore was paid by the CD, leaving an outstanding balance of Rs. 2.83 crore, including interest.

• The OC submitted that despite sending reminders, it did not receive the outstanding payment. Therefore, it issued a demand notice under s. 8 of the IBC on 07.10.2022, which was served on 10.10.2022.

• It was contended that since the CD failed to respond or make the payment within the prescribed 10-day period, the OC filed a s. 9 application on 30.10.2022, seeking initiation of the corporate insolvency resolution proceedings (‘CIRP’).

• The AA dismissed s. 9 of the IBC application and imposed a penalty of Rs. 1 lakh on the OC, citing pre-existing disputes and the application of s. 10A of the IBC.

• The Appellant contended that the AA had not given adequate opportunity to the Appellant. He had made an error in not considering the existence of an operational debt and the default on the part of the CD. Further, it was contended that the AA was wrong in holding that s. 9 of the IBC application could not have been filed since the default attracted s.10A of the IBC.

Held

• The NCLAT affirmed the AA’s decision, dismissing the appeal and upholding the penalty, citing the appellant’s malicious intent to use the insolvency process to settle familial disputes rather than resolve genuine insolvency issues.

• The NCLAT observed that the AA had rightly found that the CD had consistently denied the existence of debt and default, claiming that all payments had been made to the OC or directly to the vendors and labourers. Further, the OC failed to provide specific documentation such as work orders, e-bills, GST returns, and other relevant proof to substantiate the claimed debt.

• The NCLAT noted contradictions between the OC’s claims and their ledger accounts, which showed that the CD had made payments. It was further noted that the third invoice, dated 24.03.2020, was considered under s. 10A of the IBC prohibits insolvency applications for defaults arising during the COVID-19 period starting from 25.03.2020.

• It ruled that since the payment obligation would have arisen after 24.03.2020, the debt fell within the s. 10A of the IBC prohibition period, rendering s. 9 of the IBC application non-maintainable.

• The NCLAT observed that the amount pertaining to only the third invoice, which was raised on 24.03.2020, could have been treated as unpaid. This was one day prior to the period covered under s.10A of the IBC, and thus, it would fall under the prohibited period under s.10A. The date of the invoice cannot become the date of default since the OC did not provide proof that the invoice was delivered to the CD on the same date.

Our Analysis

The NCLAT’s judgment highlights the firm stance of the Tribunal on ensuring that insolvency proceedings under the IBC are not misused for purposes other than the genuine resolution of insolvency. The application of s. 10A of the IBC serves as a critical reminder of the protective measures during the pandemic and their enduring impact on insolvency litigation. By emphasising the need for clear and convincing evidence of debt and default, the AA and the NCLAT have reiterated that mere assertions without documentary proof are insufficient grounds for initiating CIRP. This judgment also serves as a cautionary warning to creditors who may have malicious intentions in filing fraudulent CIRP applications, and it penalises the OC for filing an application without any substantive basis.

End Note

[i] [2024] 164 taxmann.com 641 (NCLAT- New Delhi).

Authored by Maarij Ahmad, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.