NCLT Chandigarh: Indemnity Obligation Not Operational Debt Due To Lack Of Privity
NCLT Chandigarh: Indemnity Obligation Not Operational Debt Due To Lack Of Privity
The National Company Law Tribunal (NCLT) Chandigarh bench, comprising Harnam Singh Thakur (Judicial Member) and LN Gupta (Technical Member), ruled that the indemnity obligation related to a guarantee does not apply in cases concerning operational debt.
An indemnity obligation entails a promise made by one party (the indemnifier) to compensate another party (the indemnitee) for any losses or damages incurred.
Under the Insolvency and Bankruptcy Code (IBC), operational debt encompasses claims arising from the provision of goods or services, debts related to employment, and obligations to the government or local authorities.
Agarwal Foundries Private Limited (Petitioner) supplied TMT bars to Empathy Infra & Engineering Pvt. Ltd. (“Third Party”) for the Nirvana Project in Pune, Maharashtra, with the assurance that POSCO E&C India Private Limited (“Respondent”) would act as a guarantor for payment. This assurance was allegedly confirmed via email. Despite this, the third party failed to settle the outstanding amount, prompting the petitioner to issue multiple demand notices to both the third party and the respondent. The petitioner claimed that the respondent had committed to covering the third party's dues in the event of default. Feeling aggrieved, the petitioner approached the National Company Law Tribunal in Chandigarh and filed a petition under Section 9 of the Insolvency and Bankruptcy Code, 2016, seeking the initiation of the Corporate Insolvency Resolution Process (CIRP) due to the third party's default in paying Rs. 2,11,68,580/-.
The respondent contended that the petitioner did not qualify as an operational creditor under the IBC since the goods were supplied to the third party and not directly to the respondent. It was argued that the definition of operational debt does not encompass guarantees, which are distinct from financial debt. Additionally, the respondent pointed out discrepancies in the invoices submitted by the petitioner and accused the petitioner of submitting a false affidavit regarding the response to the demand notice.
The petitioner argued that corporate guarantors are considered financial debtors and that CIRP can be initiated against them without first pursuing action against the principal borrower. In contrast, the respondent argued that indemnity obligations under a guarantee do not extend to operational debts and asserted that the petition against the respondent as a guarantor for operational debt was not maintainable under Section 9 of the IBC.
The National Company Law Tribunal (NCLT) ruled that the Corporate Insolvency Resolution Process (CIRP) cannot be initiated against the respondent because there is no direct contractual relationship between the petitioner and the respondent. The tribunal emphasized that the petitioner failed to provide sufficient evidence or documentation to substantiate its claim that the respondent had guaranteed payment on behalf of the third party. The email cited by the petitioner, purportedly assuring payment, was sent by an unauthorized employee and did not constitute a valid guarantee by the company. Moreover, the NCLT noted that the email lacked the respondent's signature or verification.
Highlighting the necessity of a documented agreement signed and acknowledged by all Parties Involved, Detailing Terms, Conditions, Liabilities, and Claims, the NCLT underscored that the absence of such documentation weakened the petitioner's case.
Referring to the precedent set by the NCLAT in M.S. Jain v. TVG Limited and Another, the NCLT reaffirmed that indemnity obligations related to guarantees do not extend to cases Involving Operational Debt.
Ultimately, the NCLT concluded that the petition could not be maintained under Section 9 of the Insolvency and Bankruptcy Code (IBC) due to the lack of privity of contract between the petitioner and the respondent. Therefore, the petition was dismissed.
