Operational Creditor cannot initiate Insolvency Proceedings When Complaints Regarding Defects Remain Unresolved: NCLT rules against Schneider Electric India Pvt. Ltd. [Read Order]

In a ruling against Schneider Electric India Pvt. Ltd., the National Company Law Tribunal (NCLT), New Delhi bench has held that an Operational Creditor cannot initiate insolvency proceedings against the Corporate Debtor for non-payment, when complaints regarding defects in products remain unresolved.

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In the Indian energy management industry, Schneider Electric India Pvt.Ltd. , Operational Creditor  is a major participant, providing integrated solutions for a range of industries, buildings, data centers, and residential units. The production, delivery, and collecting of electricity are the activities of Sarkun Solar Pvt. Ltd., also known as the "Corporate Debtor."

The parties entered into 9 separate agreements for various projects across three districts in Punjab and the Operational Creditor was appointed as a contractor of the corporate Debtor. The of work included civil works along with Testing, Commissioning and supply of electrical equipment. According to the Operational Creditor, the contracts issued for the different project components totaled 91,56,83,319/-. However, it is alleged that the corporate debtor violated the terms of the agreements by repeatedly failing to release payments as agreed.

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Consequently, the Corporate Debtor received a demand notice from the Operational Creditor requesting payment. But the notice was never delivered. The operational creditor subsequently exercised the agreement's arbitration clause, but the corporate debtor did not receive the arbitration notice either. As a result, the Operational Creditor successfully dispatched a second demand letter to the Corporate Debtor's email address.

The Corporate Debtor argued that the Operational Creditor had postponed the completion of the job and had not fulfilled its contractual commitments. The Corporate Debtor brought up these issues on multiple occasions before the demand notice was sent. The operational creditor, however, did not take any action in this regard.

It further argued that it had also expressed concerns about the Operational Creditor's items' subpar quality. Notwithstanding these reservations, the Operational Creditor did not address the flaws in compliance with the terms of the contract. The Corporate Debtor notified the Operational Creditor of the unresolved problems once more, despite having received a notice for past-due payments.

The Operational Creditor responded by claiming that the Corporate Debtor had not spoken about any difficulties beforehand and that the defense had been raised after the petition was submitted.

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The bench comprising of Shri Manni Sankariah Shanmuga Sundaram (Judicial Member) and Dr. Sanjeev Ranjan (Technical Member), observed that the Corporate Debtor had raised issues relating to defective quality of products provided by the Operational Creditor, much prior to issuance of demand notice.

In addition, the Corporate Debtor has frequently expressed dissatisfaction and concerns via email, describing ongoing technological problems and the ensuing operational and financial consequences. In spite of this, the operational creditor persisted in making demands for the purportedly unpaid sum and did not take any corrective measures.

The Tribunal ruled that when there is a legitimate pre-existing dispute regarding the quality of goods and services, particularly when those issues were brought up before the demand notice was issued, the Operational Creditor cannot begin insolvency proceedings under Section 9 of the IBC.

To Read the full text of the Order CLICK HERE

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