2026 (2) TMI 738 - AT - IBC

Conditional Contractual Payment: insolvency application requires proof debtor received third party funds and then failed to remit, or admission denied.

Where contracts condition payment on receipt of funds from an insurer, an insolvency application under the Code cannot be admitted without proof that the ... Default - operational creditor - debt and default requirement under the Insolvency and Bankruptcy Code - back-to-back payment obligation - pre-existing dispute - inadmissibility of Section 9 application where default not proved - Rashtriya Swasthya Bima Yojana (RSBY) - HELD THAT:- Since, the parties are bound by the terms and conditions of the agreement in which it has been clearly stipulated that the payment shall be made by the company to the contractor back to back as per the payment received by the company from the Insurer. There is no evidence brought on record by the Appellant that the payment has been received by them from the insurer i.e. NIC except that the information collected under the RTI which is in regard to the payment by the Govt. to NIC but there is no evidence that it was further paid the respondent. Thus, in view thereof, there was no default on the part of the Respondent and hence, the Tribunal has rightly dismissed the application of the Appellant because the application under Section 7 or 9 of the Code can be admitted only if the debt and default both are proved to be in existence. We do not find any merit in the present appeal and the same is hereby dismissed, however, without any order as to costs. Issues: (i) Whether the application under Section 9 of the Insolvency and Bankruptcy Code, 2016 can be admitted when the Operational Creditor alleges non-payment but the contract provides for payment 'back to back' subject to receipt from the insurer, and whether default has been proved.Analysis: The appeal concerns three contracts under which payment to the contractor was expressly conditioned on amounts being received by the corporate debtor from the insurer (back to back payment mechanism). The adjudicating tribunal found that no evidence was produced showing that the corporate debtor had received payment from the insurer and that the corporate debtor's obligation to pay would arise only upon such receipt. The tribunal also recorded pleadings by the corporate debtor alleging substandard services and financial adjustments, which raised factual disputes relevant to liability and amounts claimed. Under the Code, an application under Section 7 or Section 9 can be admitted only where both the existence of debt and default are proved. The record lacks evidence that the corporate debtor received funds from the insurer and thereafter failed to remit payment; the Operational Creditor's RTI material showed government payment to the insurer, not remittance to the corporate debtor.Conclusion: The element of default has not been established and the application under Section 9 was rightly dismissed; decision is in favour of Respondent.Ratio Decidendi: Where a contract conditions payment on receipt of funds from a third party, insolvency proceedings under the Code require proof that the corporate debtor received the funds and then failed to remit payment; absence of such proof means default is not established and the insolvency application cannot be admitted.