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NCLT Ahmedabad Rejects Insolvency Plea Against Sadbhav Engineering Over Settlement Breach Under Section 9 IBC
The (NCLT) has dismissed a petition filed by M/s. A.R. Company seeking to initiate against M/s. Sadbhav Engineering Limited under . The Bench, comprising Judicial Member Chitra Hankare and Technical Member Dr. Velamur G Venkata Chalapathy, held that a claim arising from the breach of a cannot be treated as an " " for the purpose of triggering insolvency proceedings.
From Invoices to Settlement: The Journey of a Dispute
A.R. Company, a supplier of road and building construction materials, raised 5,735 invoices between December 2016 and March 2019, totaling ₹21.26 crore. Sadbhav Engineering made part-payments of ₹19.31 crore, leaving an alleged unpaid balance of ₹1.94 crore against 753 invoices. The petitioner, a registered Micro Enterprise, approached the in .
On , the HMSEFC passed an award directing Sadbhav Engineering to pay ₹1.94 crore along with interest at 22.25% per annum. No appeal was filed against the award, which attained finality.
The and Its Breach
Following the award, the parties voluntarily entered into a Memorandum of Understanding (MoU) on . Under the MoU, Sadbhav Engineering agreed to pay the awarded amount in eight monthly instalments. However, the respondent made only a single payment of ₹10 lakh in . A.R. Company terminated the MoU in and issued a under in before filing the present petition.
During the pendency of the petition, Sadbhav Engineering paid ₹50 lakh in and ₹1.34 crore in , aggregating to ₹1.84 crore—effectively discharging the principal amount under the award. The petitioner maintained that the payments should first be appropriated towards accrued interest and that a significant outstanding remained.
or Contractual Claim? The Core Question
Sadbhav Engineering raised several objections. It argued that the claim was based on the alleged breach of the MoU, not on the original supply of goods, and therefore did not constitute an " " under . The respondent further contended that the proceedings before the HMSEFC amounted to a , which barred admission of the petition. It also challenged the claim for interest, noting that the purchase orders did not stipulate any interest rate.
A.R. Company countered that the MoU had been terminated and that it was entitled to revert to the original invoices and the HMSEFC award. It denied the existence of any , pointing out that the award had attained finality.
Why the Tribunal Held the Petition Not Maintainable
The NCLT observed that after the HMSEFC award, the parties voluntarily entered into the MoU, which created a distinct contractual mechanism governing payment and consequences of default. The Bench noted that the MoU contained its own and provided specific remedies in case of breach.
Critically, the Tribunal held that the alleged breach of the settlement could not be equated with an arising from the original supply of goods. The Bench also noted that the invoices were and that the HMSEFC award had a separate under , which provides for .
Key Excerpts: 'Claim Arising from Breach of MOU'
The Tribunal made several significant observations:
"The claim arising from the alleged breach of the MOU has to be pursued in accordance with the remedies contemplated under the MOU and cannot, in the circumstances of the present case, be treated as anarising from the original invoices for initiation of CIRP under Section 9 of the Code."
"The Applicant cannot seek recovery of the amount awarded by the Council by invoking the jurisdiction of this Tribunal under Section 9 of the IBC. The Applicant’s remedy, if any, lies elsewhere and not with IBC as the invoices are time barred."
The Bench further clarified that even though the HMSEFC award had attained finality, the under the MSME Rules must be followed, and the IBC cannot be used as a recovery tool.
Final Verdict: Petition Dismissed, Alternative Remedies Available
In its order dated , the NCLT rejected and disposed of the matter. The decision underscores the principle that a supersedes the original debt for the purposes of the IBC, and a breach of such settlement must be remedied through the contractual mechanisms agreed upon by the parties, not through insolvency proceedings.
The ruling serves as a reminder that the IBC is not a recovery code and that creditors cannot use the threat of CIRP to enforce settlements that have their own dispute-resolution frameworks.
