Debt owed by one Partner does not make the other Partner liable under IBC: NCLT

Debt owed by one Partner does not make the other Partner liable under IBC: NCLT

IBC does not protect the interest or claim of the partner against another partner or the Firm as such though, the Financial Creditor may be entitled to the claims against the Corporate Debtor under any other law in force which may provide the legal recourse to the Financial Creditor.

The National Company Law Tribunal (NCLT), Mumbai Bench recently held that "IBC does not protect the interest or claim of the partner against another partner or the Firm" while adjudicating a company petition under Section 7 of the Insolvency and Bankruptcy Code, 2016.

It was claimed by the Financial Creditor, that it had disbursed a loan amount of 5,25,000 in favor of one Kavya Construction Co. (Borrower Firm), which is a partner of Kavya Buildcon Pvt. Ltd (Corporate Debtor). The total debt amount as of 31.03.19 was ₹ 9,72,876 inclusive of interest of 12% p.a.

The Financial Creditor relied on a copy of the Deed of Retirement from partnership dated 31.12.15 to establish that the Corporate Debtor is a partner of the borrower firm, therefore the Corporate Debtor was jointly liable for the repayment of the said debt amount.

In response to these submissions, the Corporate Debtor contended that the Financial Creditor had neither provided any loan in favor of the Corporate Debtor nor furnished any documents to prove the same. It was submitted that the provisions with respect to proceedings to be initiated against the Partnership Firms have not been notified in the IBC yet.

Given the submissions by both parties, the Tribunal was of the view that there is no dispute that the Borrower Firm owed money to the Financial Creditor as the money due and payable were not paid by the Borrower Firm, hence the default was committed. However, there was no default by the Corporate Debtor.

The Tribunal observed, "According to the definition of Corporate Debtor as given in Section 3(8) of the Code, "corporate debtor means a corporate person who owes a debt to any person." This Bench is of the view that referring to the said section, the Corporate Debtor does not owe any debt to the Financial Creditor and hence proceedings against Corporate Debtor under this Code would be inappropriate."

The Tribunal also placed reliance on the case of Transmission Corporation of Andhra Pradesh Limited v. Equipment Conductors and Cables Limited [C.A No. 9597/2018 dated 23.10.2018 (2018) 147 CLA 112 [SC] para 15, wherein the Supreme Court had observed as under:

"In a recent judgment of this Court in Mobilox Innovations Private Limited v. Kirusa Software Private Limited (2018) 1 SCC 353, this court has categorically laid down thatIBC is not intended to be substitute to a recovery forum. It is also laid down that whenever there is existence of real dispute, the IBC provisions cannot be invoked…"

The Tribunal added that the IBC does not protect the interest or claim of the partner against another partner or the Firm as such though, the Financial Creditor may be entitled to the claims against the Corporate Debtor under any other law in force which may provide the legal recourse to the Financial Creditor.

The NCLT concluded that there is no evidence of any agreement between the Financial Creditor and the Corporate Debtor to establish the existence of default on part of the Corporate Debtor. Therefore, the present Company Petition was thereby dismissed.