Introduction
The Hon’ble National Company Law Tribunal, Mumbai (‘NCLT’), in the case of Royal Construction v. Gannon Dunkerley & Company Ltd.[i], adjudicated on the maintainability of a corporate insolvency resolution process (‘CIRP’) petition filed by the operational creditor (‘OC’) under s. 9 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’). The key issues before the NCLT were whether the corporate debtor (‘CD’) defaulted on its payment obligations and whether any pre-existing dispute existed between the OC and the CD.
Brief Facts
Royal Construction (‘Petitioner/OC’) entered multiple work orders with Gannon Dunkerley & Company Ltd. (‘Respondent/CD’) for various construction works, including excavation and civil engineering projects.
The OC issued invoices for the work completed and subsequently served Demand Notices ('DNs') dated 17.08.2020, 15.09.2020 and 27.01.2022, seeking payment of outstanding dues.
In its reply dated 15.02.2022 to the second DN, the CD argued that there was a pre-existing dispute regarding the quality of work. The CD claimed that two of three projects were severely delayed and left incomplete by the OC. The third project suffered from poor workmanship, the use of inferior materials, and delays in service completion.
The CD further contended that the default fell within the period covered by s. 10A of the IBC, which provides a COVID-19-related exemption from CIRP proceedings.
The OC filed an application under s. 9 of the IBC to initiate the CIRP against the CD for the default amount.
Held
The NCLT dismissed the CIRP application filed by the Petitioner/OC and made the following observations:
That the claim of the OC was barred under s. 10A of the IBC, as the alleged default dates (03.05.2020, 15.08.2020, and 01.01.2021) fell within the period covered under s. 10A of the IBC, thereby making the application non-maintainable.
A pre-existing dispute existed between the parties prior to the issuance of the DNs under s. 8 of the IBC, as evidenced by multiple letters and communications from the CD alleging delays and substandard work by the OC.
The NCLT relied on the Supreme Court ruling in Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd.[ii], which established that CIRP could not be initiated where a genuine pre-existing dispute is evident.
Further, the NCLT found merit in the argument of the CD, which relied on Ramesh Kymal v. Siemens Gamesa Renewable Power (P) Ltd.[iii], to argue that the OC could not alter the date of default mentioned in the DN at a later stage of proceedings. Consequently, the NCLT held that the OC must adhere to the date of default as originally stated in its DN.
The NCLT further observed that the CD had reassigned the remaining work to third parties due to the OC’s poor performance, further supporting the existence of a pre-existing dispute.
Lastly, the NCLT concluded that the CD provided sufficient evidence to demonstrate that the CIRP application was filed primarily as a recovery mechanism rather than a genuine insolvency proceeding, and there was no clear case for default under IBC. Consequently, the NCLT dismissed the CIRP application filed by the OC.
Our Analysis
The present judgment reinforces the principle that insolvency proceedings under the IBC are not to be used as a tool for mere debt recovery but are intended for the resolution of genuine financial distress. The NCLT reaffirmed that when a pre-existing dispute is evident, as in this case, where the CD had raised quality and performance issues well before the DN, the CIRP cannot be initiated.
Additionally, the ruling highlights the strict application of s. 10A of the IBC, ensuring that defaults occurring during the specified COVID-19 relief period cannot be used as a basis for insolvency proceedings.
End Notes
[i] 2025 SCC OnLine NCLT 302 dated 13.01.2025.
[ii] (2018) 1 SCC 353.
[iii] (2021) 3 SCC 224.
Authored by Mohammad Sarfaraj Idrisi, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.
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