NCLAT UPHOLDS NCLT’S DISMISSAL OF INSOLVENCY APPLICATION AS THERE WAS NO PRIVITY OF CONTRACT BETWEEN PARTIES

INTRODUCTION

A two- Member Bench comprising of Justice Rakesh Kumar Jain and Mr. Indevar Pandey of the National Company Law Appellate Tribunal Principal Bench, New Delhi passed an Order dated 16.05.2024 in Comp. App. (AT) (Ins) No. 1034 of 2022 & I.A. No. 2993 of 2022 in Ambika Enclave Pvt. Ltd. & Ors. Vs. Shreesai Baba Infra Projects Pvt. Ltd. and held that as there was no direct contractual relationship between the Appellants and the Respondent, there was no privity of Contract between the Parties, hence Section 7 Application of the Insolvency and Bankruptcy Code, 2016 was held as non-maintainable.

FACTS

1) The Appellants, Ambika Enclave Pvt. Ltd., M/s Siddhant Diagnostic Pvt. Ltd. and M/s Divya Tie-Up Pvt. Ltd. had advanced a loan of more than 16 Crores to Proplarity Group (now Sparkspell Homes Pvt. Ltd.) under a Loan Agreement dated 13.10.2016.

2) Proplarity Homes Pvt. Ltd. (PHPL) entered into a Sale Deed with the Respondent, Shree Sai Baba Infra Projects Pvt. Ltd.  for the sale of several blocks in a project named ‘Pratham’ located in Lucknow for 3.90 Crores. The Sale Deed included a clause (Clause 35) that stated as follows:

“as per the direction of Vendor payment/consideration has been received from confirming party. Confirming party is involved in Deed for the payment receiving of Sale Consideration because unsecured loan was born by Vendor from the Confirming party, so the Confirming Party is receiving the Sale Consideration. Vendor hereby confirm that he has received payment from the Confirming party and confirming party hereby declare that he has no objection about this sale deed”.

3) The Appellants filed an Application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (the Code) (Initiation of corporate insolvency resolution process by financial creditor). The Application was against Shree Sai Baba Infra Projects Pvt. Ltd. (the Respondent).

4) In the meanwhile, PHPL came under Corporate Insolvency Resolution Process (CIRP) and the Interim Resolution Professional (IRP), namely Anuj Kumar Tiwari issued a Demand Notice dated 15.09.2020 to the Respondent asking for payment of the outstanding sale consideration.

5) It was alleged that the Respondent in his Reply dated 01.10.2020 admitted and acknowledged that cheques mentioned in the Sale Deed dated 01.05.2017 were drawn in favour of the Appellants.

6) The NCLT dismissed the Application filed by the Appellants on the basis that there was no Privity of Contract between the Appellants (Financial Creditors) and the Respondent. The Ld. Tribunal observed that the loan was disbursed to PHPL and not to the Respondent. As such, the Respondent was not a party to the Loan Agreement and no financial debt existed between the Appellants and the Respondent under the definition provided in Section 5(8) of the Code.

7) Aggrieved by the decision of the NCLT(), the Appellants filed App. (AT) (Ins) No. 1034 of 2022 & I.A. No. 2993 of 2022 before the NCLAT.

NCLAT ANALYSIS

The NCLAT vide Order dated 16.05.2024, made the following observations:

i) The NCLAT observed that there was no dispute that the Appellants had advanced the loan to PHPL and not to Respondent.

ii) That there was no Privity of Contract between the Parties. PHPL had failed to repay the loan to the Appellants.

iii) That it was provided in Clause 35 of the Sale Deed that the Vendee/Respondent shall pay to the Confirming Party and that the money was already paid by the Vendee/Respondent to the Confirming Party.

ORDER

After going through all the facts and circumstances of the case, the Bench held that it was not a case which would fall within the provisions of the Code to trigger CIRP, invoking Section 7 of the Code and hence, the Ld. Tribunal had rightfully dismissed the Application. A liberty had been granted to the Appellants to pursue their other remedy for the purpose of recovery. Further, it would also be not out of place to mention that the regime of the Code is not for recovery, but for the resolution of debt by maximization of the asset and to bring the Corporate Debtor on its own feet. Therefore, not only Respondent was dragged in the litigation at the instance of the Appellants before the Tribunal but also in this Appeal in which no case was made out at all. Hence, the Appeal was hereby dismissed and since Respondent had been dragged in this litigation unnecessarily by the Appellants up to this Court, therefore, the Appellants were saddled with costs of Rs. 1 Lakh which would be paid by them jointly in equal proportion to Respondent by way of bank draft within a period of one month from the date the Order, i.e., 16.05.2024. It was also held that in case the cost was not paid, as directed, the Respondent would be free to file an Application/Contempt Petition before the Tribunal for the purpose of compliance of the Order dated 16.05.2024.

 

Kartik Khandekar

Senior Legal Associate

The Indian Lawyer & Allied Services