NCLAT upholds rejection of Section 9 petition due to lack of contractual privity between parties

NCLAT dismissed the appeal challenging rejection of Section 9 petition. The tribunal found no privity of contract between appellant and respondent regarding operational debt. Appellant had raised invoices against a third party (EPC contractor) but later initiated insolvency proceedings against respondent for the same invoices, which was deemed an afterthought. The adjudicating authority correctly concluded that mere involvement in project reconciliation or work completion signing by the project owner did not establish debtor-creditor relationship. No invoices were raised against respondent, no payments received from respondent, establishing absence of contractual privity required for Section 9 proceedings.

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ISSUES PRESENTED and CONSIDERED

The primary issue considered was whether the dismissal of the Section 9 Petition under the Insolvency and Bankruptcy Code, 2016 (the "Code") by the Adjudicating Authority was correct, specifically focusing on the existence of privity of contract between the Appellant and the Respondent. Additionally, the Tribunal examined whether the Respondent could be held liable for the operational debt claimed by the Appellant despite the involvement of a subsidiary company, Hindustan Thermal - EPC.

ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

The legal framework primarily involved the interpretation of Sections 3(8), 3(6), 5(20), and 5(21) of the Insolvency and Bankruptcy Code, 2016. The Appellant argued that these sections support the existence of an operational debt and the Respondent's liability as a corporate debtor. The Tribunal also considered the precedent set by the Supreme Court in Arcelormittal India Private Limited vs. Satish Kumar Gupta & Ors., which discusses the lifting of the corporate veil in insolvency cases.

Court's Interpretation and Reasoning

The Tribunal concluded that there was no privity of contract between the Appellant and the Respondent. It emphasized that the invoices were raised against Hindustan Thermal - EPC, not the Respondent, and that the majority of payments were received from Hindustan Thermal - EPC. The Tribunal found that the Appellant's attempt to hold the Respondent liable was an afterthought and not supported by the facts.

Key Evidence and Findings

The evidence included various documents such as letters of intent, letters of award, and completion certificates. The Appellant presented these to argue that the Respondent was the ultimate beneficiary of the project. However, the Tribunal noted that these documents indicated transactions primarily with Hindustan Thermal - EPC. The Tribunal also considered the Respondent's balance sheets and the correspondence between the parties, which did not establish a direct contractual relationship with the Respondent.

Application of Law to Facts

The Tribunal applied the provisions of the Code to determine the existence of an operational debt and the relationship between the parties. It found that the Appellant failed to establish a debtor-creditor relationship with the Respondent, as required under Section 9 of the Code. The Tribunal also considered the pre-existing dispute between the Appellant and Hindustan Thermal - EPC, which further undermined the Appellant's claim.

Treatment of Competing Arguments

The Tribunal addressed the Appellant's argument that the Respondent was the ultimate beneficiary and should be liable for the debt. It rejected this argument, noting that the Appellant initially pursued claims against Hindustan Thermal - EPC and only later targeted the Respondent. The Tribunal also dismissed the Appellant's reliance on the corporate veil doctrine, finding no basis to pierce the corporate veil in this case.

Conclusions

The Tribunal concluded that the Appellant's Section 9 Petition was not maintainable due to the lack of privity of contract and the existence of a pre-existing dispute. It dismissed the appeal, allowing the Appellant to pursue other legal remedies.

SIGNIFICANT HOLDINGS

The Tribunal held that "there is no privity of contract between the applicant and the respondent." It emphasized that the invoices were raised against Hindustan Thermal - EPC, and the payments were made by Hindustan Thermal - EPC. The Tribunal found that the Appellant's attempt to hold the Respondent liable was not justified.

The Tribunal also noted that "merely because the respondent tried to reconcile or settle between the applicant & Hindustan Thermal or merely because the work completion was signed by the respondent being the owner of the project does not entitle the respondent to be liable for the outstanding amount."

The core principle established is that privity of contract is essential for a Section 9 Petition under the Code, and the existence of a pre-existing dispute can bar such proceedings. The Tribunal's final determination was to dismiss the appeal, affirming the Adjudicating Authority's decision.

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