Case: Rahee Jhajharia E to E JV v. MB Power (Madhya Pradesh Ltd.)
The National Company Law Appellate Tribunal (NCLAT), New Delhi, has ruled that an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC), cannot be admitted when there is no direct contractual relationship between the Operational Creditor and the Corporate Debtor. In this case the Tribunal dismissed the claim of ₹16.08 crore, holding that the invoices were raised by the Appellant against Hindustan Thermal and not to the Corporate Debtor itself.
Facts of the Case
The case involved a railway contract awarded by the Respondent to the Appellant for a project in Jaithari, Madhya Pradesh. Although the contract was awarded by the Respondent, it was executed between Respondent’s sister company, Hindustan Thermal EPC and the Appellant, Rahee Jhajharia E to E JV.
The Appellant sought to recover outstanding dues from the Respondent rather than Hindustan Thermal EPC under IBC. The claim was rejected on the grounds that there was no privity of contract between the Appellant and the Respondent.
The Appellant argued that MB Power was actively involved in the execution of the contract and co-signed work completion certificates, indicating its role in the project. It also claimed that MB Power acted as a guarantor for the payments.
However, MB Power contended that it had never issued work orders or purchase orders to the Appellant, nor had it received any invoices. Also, the Purchase Order with Reference No. MBCPL/MP/LOA/RS/12- 13/10006 and also the work order MBCPL/MP/WO/RS/12-13/10006 was issued to the Appellant by Hindustan Thermal – EP. It emphasized that it was a separate legal entity from Hindustan Thermal EPC and could not be held liable for its sister concern’s obligations.
Significantly, the Appellant initially issued a demand notice under Section 8 to Hindustan Thermal EPC but later withdrew it and sent a fresh demand notice to MB Power for the same invoices. MB Power rejected this demand, arguing that it was an attempt to bypass legal obstacles after realizing that a claim could not be pursued against Hindustan Thermal EPC.
Tribunal’s Decision
The NCLAT upheld the rejection of the Section 9 application, citing the following key reasons:
- No Privity of Contract: The invoices were issued to Hindustan Thermal EPC, not MB Power. Since MB Power was not a party to the contract, no debtor-creditor relationship existed.
- Invalid Demand Notice: The Tribunal viewed the Appellant’s decision to send a demand notice to MB Power after withdrawing it from Hindustan Thermal EPC as invalid.
- Separate Legal Entities: MB Power and Hindustan Thermal EPC, though part of the same corporate group, were distinct entities. A corporate group relationship does not automatically create financial liability.
- Disputed Claims: Hindustan Thermal EPC had previously raised quality concerns and counterclaimed ₹20.10 crore against the Appellant.
- No Admission of Debt: MB Power had not acknowledged any liability, and merely attempting to mediate or reconcile payments did not establish a financial obligation
The Tribunal concluded that in the absence of privity of contract and clear financial liability, an application under Section 9 could not be entertained.
Our Comments
This ruling reinforces the fundamental principle that privity of contract is essential for an application under Section 9 of the IBC to be maintainable. While it was already established that a lack of privity between an Operational Creditor and a Corporate Debtor bars a Section 9 application, this decision clarifies and carves out specific circumstances where such privity is absent.
The emphasis on separate legal identities within corporate groups is particularly significant. The ruling makes it clear that even if a company is actively involved in a contract’s execution or facilitates payments, it cannot be held liable under Section 9 unless there is a direct contractual obligation. Additionally, the Tribunal’s stance on the invalidity of shifting demand notices from one entity to another highlights the importance of identifying the correct debtor from the outset.
By addressing these nuances, this judgment provides clearer guidance on determining privity of contract in insolvency cases and prevents misuse of IBC proceedings against entities that are not direct parties to a transaction.
For a deeper dive into ibc and its evolving jurisprudence, check out our guide here: https://rdlawchambers.com/comprehensive-guide-on-insolvency-and-bankruptcy-code-and-nclt-proceedings/