2025 (8) TMI 337 - AT - IBC

Principal Employer Not Debtor Under IBC Section 9 Without Contractual Privity with Sub-Contractor

The NCLAT held that the principal employer cannot be treated as the debtor under Section 9 of the IBC where there is no privity of contract with the ... Admissibility of application u/s 9 of IBC - principal employer can be treated as debtor or not - pre-existing dispute regarding reconciliation of accounts between the sub-contractor and the contractor or not - privity of contract with the respondent - HELD THAT:- A bare perusal of the clauses 11.4 and 11.11 indicates that the prime responsibility of payment to sub-contractor lies on the contractor with the employer reserving its right, with intimation to contractor, to make payments due to sub-contractor, whenever employer has reason to believe contractor has not made the payment on a timely basis, though these payments shall be made on behalf of the contractor and that the contractor is required to immediately credit, secure or repay the amount of such payments to the principal employer. It is clearly recorded that under no circumstances the sub-contractor can make a claim against the employer. The minutes of the meeting dated 09.04.2018 nowhere record that SRCPL has taken over the responsibility of payment, as the payer is not identified. The unilateral Indemnity Bond given by EBPL records in para 11, that the Indemnity Bond is given both to SRCPL and GDCL, and it is binding on EBPL. A similar issue was considered by the Hon’ble Supreme Court in M/s Essar Oil Limited v. Hindustan Shipyard Ltd. & Ors. [2015 (7) TMI 373 - SUPREME COURT] wherein ONGC, as principal employer, had entered into a contract with Hindustan Shipyard Ltd, which in turn has entered into a sub-contract with M/s Essar Oil Limited (the appellant in both the appeals) and it was held that 'The ONGC shall not be liable to make payment, as rightly decided by the Arbitral Tribunal, to the appellant but the payment shall have to be made by the respondent, who had given a sub-contract to the appellant. Majority view of the Arbitral Tribunal on the above issue is confirmed and the view of the High Court is not accepted.' This Tribunal in the case of Sterling and Wilson Private Limited v. Embassy Energy Private Limited [2023 (6) TMI 1006 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, CHENNAI] has followed the decision of Hon’ble Supreme Court in M/s Essar Oil Limited v. Hindustan Shipyard Ltd. on similar facts and held that there is no privity of contract between the appellant and respondent. From the facts of this case, and in the light of judicial pronouncements, it can be said that there was no privity of contract between SRCPL and EBPL and it cannot be said that SRCPL had taken over the liability of GDCL in any manner. The appellant has not been able to establish any privity of contract with the respondent. It is also noted that there was pre-existing dispute regarding reconciliation of accounts between the sub-contractor and the contractor. It is unable to find any reason to interfere with the impugned order - Appeal dismissed. ISSUES: Whether the principal employer can be treated as a debtor under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC, 2016) on the basis of minutes of meeting and indemnity bond with the sub-contractor, thereby substituting itself in place of the original contractors.Whether there existed a pre-existing dispute between the sub-contractor and the principal employer regarding the operational debt claimed under Section 9 of the IBC, 2016.Whether payments made by the principal employer on behalf of the contractors create a privity of contract or liability on the principal employer towards the sub-contractor.Whether the application under Section 9 of the IBC, 2016 is maintainable against the principal employer in absence of direct contractual relationship and in presence of a pre-existing dispute. RULINGS / HOLDINGS: The principal employer cannot be treated as a debtor to the sub-contractor merely because it facilitated settlement discussions and made payments on behalf of the contractors; 'mere facilitation of the dispute cannot create a right in favour of the applicant to file this present application against the respondent as it debtor.'There was no privity of contract between the sub-contractor and the principal employer, and the principal employer did not assume liability of the contractors; hence, the principal employer is not liable to pay the operational debt claimed by the sub-contractor.The minutes of meeting and indemnity bond explicitly state that 'all other terms and conditions of the work orders issued by GDCL/VNCPL to the applicant shall remain unaltered,' and do not identify the principal employer as the payer, thereby negating any novation or substitution of liability.The existence of unresolved reconciliation of accounts and counterclaims between the sub-contractor and contractors constitutes a 'pre-existing dispute,' which bars admission of the Section 9 application as per the Supreme Court ruling in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd.Payments made by the principal employer on behalf of contractors were made 'to facilitate the respondent' and do not establish contractual liability or privity of contract between the principal employer and the sub-contractor.The application under Section 9 of the IBC, 2016 against the principal employer is not maintainable and is therefore dismissed. RATIONALE: The Court applied the contractual framework between the principal employer and contractors, and between contractors and sub-contractor, emphasizing clauses 11.4 and 11.11 of the General Conditions of Contract which clarify that sub-contractors have no direct claim against the employer and that payments by the employer on behalf of contractors do not create contractual obligations.The Court relied on the principle that 'mere facilitation' or payments made on behalf of a party do not amount to novation or substitution of contractual liability, referencing the Supreme Court judgment in Essar Oil Ltd. v. Hindustan Shipyard Ltd., which held that payments made by the principal employer on behalf of contractors do not create privity of contract with sub-contractors.The Court recognized the existence of a pre-existing dispute due to pending reconciliation of accounts and counterclaims, consistent with the Supreme Court's directive in Mobilox Innovations Pvt. Ltd. that applications under Section 9 cannot be admitted where disputes exist requiring detailed inquiry.The indemnity bond and minutes of meeting were interpreted strictly, noting that they did not alter the contractual relationship or create new obligations on the principal employer towards the sub-contractor.The Court noted that summary proceedings under Section 9 of the IBC, 2016 require clear evidence of operational debt and absence of dispute, which was lacking due to the ongoing reconciliation and counterclaims.There was no dissenting or concurring opinion recorded in the judgment.