NCLT: Claim arising out of Partnership Business, which is Not a Mere Claim of Supply of Material is Not an ‘Operational Debt’

NCLT: Claim arising out of Partnership Business, which is Not a Mere Claim of Supply of Material is Not an ‘Operational Debt’

The National Company Law Tribunal (NCLT), Mumbai by its division member bench comprising of H.V. Subba Rao (Judicial Member) and Madhu Sinha (Technical Member), while hearing an application filed under Section 9 of Insolvency and Bankruptcy Code, 2016 (“IBC, 2016”) in the matter of Manoj Stone Infra Private Limited vs. Railsys Engineers Private Limited, ruled that the claim arising out of a mutual business understanding of partnership business, which is not a mere claim arising out of supply of material, is not an ‘Operational Debt.’

In the present case, Railsys Engineers Private Limited (“Corporate Debtor”) issued a purchase order dated 2 March, 2021 for supply of signaling cables and kyosan made electronic interlocking items. The good were delivered on 29 March, 2021 and Manoj Stone Infra Private Limited (“Operational Creditor”) raised 2 invoices amounting to a total of Rs 2,57,26,234 which were duly received and acknowledged by the Corporate Debtor. The Corporate Debtor made a payment of Rs. 62,85,000 but the remaining amount of Rs.1,94,41,234 remained outstanding. It was contended that as the Corporate Debtor was not willing to release any payments, the Operational Creditor was constrained to issue a Demand Notice dated 8 February, 2022.

The two primary issues that came up for consideration before the bench was:

1. Whether the debt claimed by the Petitioner falls under the purview of an Operational Debt?

2. Whether there exists of pre-existing disputes between the parties?

The NCLT on perusal of the e-mail was of the view that there was a partnership business dealing between the parties in which the supply of material by Operational Creditor was also one of the transactions and compliances. Therefore, the Bench was of the considered opinion that the above claim raised by the Operational Creditor was not a mere claim arising out of supply of material.

In this regard, the NCLT while relying on the decision passed by the National Company Law Appellate Tribunal (NCLAT) in Jain Irrigation Systems Ltd. vs. Pragyawan Technologies Pvt. Ltd. (2023), held since, the claim was arising out of a mutual business understanding of partnership business, the debt claimed by Operational Creditor does not fall within the definition of “Operational Debt” and accordingly the first issue was answered against the Operational Creditor.

The second issue was with regard to the existence of pre-existing disputes.

The NCLT while considering the emails exchanged between the parties and the Letter issued by RITES Ltd. placed on record by the Corporate Debtor, inferred and concluded that there was a pre-existing dispute between the Corporate Debtor and Operational Creditor with regard to the quality of material supplied by the Operational Creditor.

The bench also noted that the Demand Notice in the present case was issued under Section 8(1) of the IBC on 8 February, 2022, the Corporate Debtor placed their earlier correspondences dated 24 December, 2021 raising issues with respect to the quality of goods supplied by the Petitioner which was prior to issuing Demand Notice.

It was thus seen that the dispute was brought to the notice of the Petitioner prior to the issuance of the demand notice dated 8 February, 2022 issued under Section 8(1) of the IBC.

Apropos to this, the NCLT referred the decision passed by the Supreme Court in M/s. S. S. Engineers vs. Hindustan Petroleum Corporation Ltd (2022), held that if the debt is disputed, the application of the Operational Creditor for initiation of CIRP must be dismissed. It is not the object of the IBC that CIRP should be initiated to penalize solvent companies for non- payment of disputed dues claimed by an Operational Creditor.

Applying the above law laid down by the Supreme Court in the above two referred judgments to the present case on hand, the NCLT was of the considered view that there were “Pre-existing disputes” between the parties and accordingly the second issue was also answered against the Operational Creditor.

For the aforesaid reasons the Bench held that there was no merit in the Petition and the same was dismissed.