NCLAT Upholds Rejection of Insolvency Plea by Ahluwalia Contracts Against Shristi Infrastructure
Pre-existing disputes and liquidated damages issues lead to dismissal of Section 9 application under the Insolvency and Bankruptcy Code.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, in a recent judgment, upheld the decision of the National Company Law Tribunal (NCLT), Kolkata, to reject the insolvency application filed by Ahluwalia Contracts (India) Limited against Shristi Infrastructure Development Corporation Limited. The appeal, filed under Section 61 of the Insolvency and Bankruptcy Code, 2016, was dismissed on grounds of pre-existing disputes and the unresolved matter of liquidated damages.
Ahluwalia Contracts, the appellant, had entered into a contract with Shristi Infrastructure in 2012 for executing civil works for a five-star hotel project in New Town, Rajarhat. The appellant claimed that the work was completed by August 31, 2015, and a final bill was submitted in July 2016. Despite receiving a completion certificate in November 2016, the appellant alleged non-payment of dues amounting to Rs. 3,61,18,255.
However, the respondent, Shristi Infrastructure, contended that the project was delayed and the work was substandard, leading to multiple pre-existing disputes. They also pointed to 89 emails highlighting defects and delays in the project, which were communicated to Ahluwalia Contracts well before the demand notice was issued under Section 8 of the Code in September 2020.
The NCLAT supported the NCLT's view that the adjudicating authority's role in a Section 9 application is limited to ascertaining the existence of non-payment of operational debt and any pre-existing disputes. The tribunal noted that the presence of pre-existing disputes, as documented through communications and emails, invalidated the appellant's claim, as the Code is not a forum for debt recovery but for resolving corporate insolvency.
Furthermore, the tribunal agreed with the NCLT's assessment that issues like liquidated damages, which were also in dispute, cannot be adjudicated in summary proceedings under the Code. The tribunal emphasized that such matters require detailed scrutiny, which is beyond the scope of summary proceedings intended under the Insolvency and Bankruptcy Code.
The NCLAT's decision reaffirms the principle that any pre-existing dispute, when substantiated, is a valid ground for rejecting an insolvency application under Section 9. The appellant's argument that the completion certificate issued by the respondent was unconditional was also dismissed, as the tribunal found the certificate contained specific caveats that allowed the respondent to raise genuine disputes concerning the quality of work.
The judgment underscores the necessity for operational creditors to ensure that no substantial disputes exist before proceeding with insolvency applications, as the presence of such disputes can lead to dismissal.
Bottom Line:
Insolvency and Bankruptcy Code - Pre-existing disputes and their impact on Section 9 application under the Code - Adjudicating Authority cannot decide issues like liquidated damages under summary proceedings.
Statutory provision(s): Insolvency and Bankruptcy Code, 2016 - Sections 8 and 9
