The NCLAT in this recent landmark decision has once again underscored a critical principle under the Insolvency and Bankruptcy Code, 2016 (“IBC”)—that the Code is not meant to be used as a substitute for debt recovery. The Tribunal allowed the appeal filed by Pravin Electricals Pvt. Ltd. and set aside the admission order under Section 9 of the IBC passed by the NCLT, Mumbai Bench. This judgment serves as an important reiteration of the threshold of “pre-existing dispute” under IBC and the limits of its jurisdiction when contractual disputes are involved.
Factual Matrix
Pravin Electricals Pvt. Ltd. (“Corporate Debtor”) had been awarded two contracts by MSEDCL in 2018 for supply and installation work. These contracts permitted sub-contracting. Accordingly, the Corporate Debtor subcontracted work to Akshaya Engineering Works Pvt. Ltd. (“Operational Creditor”). Disputes arose when payments allegedly due to the Operational Creditor were not made in full, despite submission of 17 invoices totaling ₹4.43 Cr. A demand notice under Section 8 of the IBC was served, followed by a Section 9 application before the NCLT for recovery of ₹1.54 Cr. including interest.
The NCLT admitted the application. The Corporate Debtor challenged the admission before the NCLAT.
Key Issues
- Whether the Operational Creditor had demonstrated an undisputed operational debt?
- Whether there existed a “pre-existing dispute” prior to the issuance of the demand notice?
- Whether payment obligations were conditional upon receipt of payment from MSEDCL (i.e., a “pay-when-paid” model)?
- Whether the IBC forum was appropriate to adjudicate contractual disputes and issues of reconciliation?
NCLAT’s Observations and Ruling
1. Existence of Pre-existing Dispute
The NCLAT emphasized that under the Supreme Court ruling in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2018) 1 SCC 353, a Section 9 application must be rejected if there exists a genuine dispute prior to the demand notice. Here, the Appellant placed on record several communications—emails dated August and September 2021—clearly stating that no confirmation of ledger balances was possible until final reconciliation with MSEDCL. These preceded the demand notice and demonstrated a live dispute.
2. Back-to-Back Payment Clauses
Both the LoAs and contract terms between the parties incorporated a back-to-back payment condition tied to MSEDCL’s payments. The NCLAT found that these terms were validly agreed and could not be ignored. The payment was contingent on milestone certifications and HOTO certificates from MSEDCL, which were either incomplete or disputed.
3. Shoddy Performance and Penalties
The Tribunal took note of correspondence and documents evidencing MSEDCL’s dissatisfaction with work progress, partial termination of contract, and imposition of penalties totaling ₹1.88 Cr. These communications, exchanged well before the demand notice, clearly pointed to disputes on performance and liability.
4. IBC Not a Forum for Contractual Disputes
The NCLAT decisively held that the issues raised pertained to contractual disputes, reconciliation, and counterclaimswhich required detailed examination of evidence. Such matters, it observed, are beyond the scope of the summary jurisdiction under the IBC. It cited the Supreme Court’s guidance that IBC is not meant to substitute debt recovery procedures.
Final Verdict
The NCLAT allowed the appeal, set aside the NCLT’s order initiating CIRP, and restored the Corporate Debtor to full management. The Tribunal also clarified that the Operational Creditor was free to pursue alternate legal remedies in appropriate forums.
Significance of the Judgment
This judgment reinforces three essential principles:
- IBC is not a substitute for recovery mechanisms—it is a tool for resolving genuine insolvency.
- Existence of even a plausible pre-existing dispute bars admission under Section 9.
- “Pay when paid” clauses, if contractually agreed, can be relevant to determine whether a debt has crystallized.
This ruling should caution operational creditors against invoking IBC to pressure recovery of disputed dues, particularly where contractual and performance disputes are evident.
Disclaimer
This blog post is intended for informational purposes only and does not constitute legal advice. Readers are advised to consult qualified professionals for advice specific to their circumstances. The contents are based on publicly available sources and judicial pronouncements, and while care has been taken to ensure accuracy, no liability is accepted for any errors or omissions.