Tribunal Rules Operational Creditor Cannot Invoke Section 9 of IBC for Recovery of Awarded Amount Without Following MSME Council Execution Rules; Breach of Settlement Agreement Remedies to Be Pursued Separately
In a significant ruling dated August 19, 2026, the National Company Law Tribunal (NCLT), Ahmedabad Bench, rejected a petition filed by M/s. A.R. Company against M/s. Sadbhav Engineering Limited under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) seeking initiation of Corporate Insolvency Resolution Process (CIRP). The case concerned an operational debt claim based on an award passed by the Haryana Micro and Small Enterprises Facilitation Council (HMSEFC) and subsequent breach of a settlement agreement.
M/s. A.R. Company, an operational creditor engaged in supplying construction materials, had supplied goods to Sadbhav Engineering Limited between December 2016 and March 2019, raising invoices totaling over Rs. 21.26 crores. While partial payments were made by the Corporate Debtor, a balance of Rs. 1.94 crores remained unpaid on 753 invoices dated between May 2018 and March 2019. The creditor approached the HMSEFC, which passed an award in November 2022 in favor of the creditor for the outstanding amount along with interest at 22.25% per annum.
Despite no appeal being filed against the award, the Corporate Debtor and the creditor entered into a Memorandum of Settlement (MOU) in March 2023, agreeing on a staggered payment plan. However, the debtor defaulted after paying only Rs. 10 lakhs, leading to termination of the MOU by the creditor and issuance of a demand notice under Section 8 of the IBC. The creditor then filed a Section 9 petition before the NCLT seeking initiation of CIRP for the claimed default amount plus interest.
The Corporate Debtor contested the petition on several grounds, chiefly arguing that:
- - The claim was based on the MOU and not an operational debt as defined under the IBC;
- - The award and prior proceedings before HMSEFC constituted a pre-existing dispute, barring invocation of CIRP;
- - The petition did not disclose a valid date of default and improperly included interest claims; and
- - The petition was filed without proper authorization of the partnership firm.
After hearing submissions and reviewing extensive documentary evidence, including the award, MOU, legal notices, and payment records, the Tribunal made key observations:
- - The original invoices forming the basis of the claim were time-barred, and the award passed by the HMSEFC was final and unchallenged;
- - The MOU executed post-award created a separate contractual mechanism with its own dispute resolution and consequences for default. The breach of the MOU cannot be transformed into an operational debt claim under Section 9;
- - The remedies for breach of the MOU should be pursued as per its terms, not through insolvency proceedings;
- - Rule 10 of the HMSEFC Rules, 2021 mandates that execution of MSME Council awards must be done through recovery by the Collector as arrears of land revenue, which the petitioner failed to follow;
- - The Insolvency and Bankruptcy Code is not a recovery forum for such claims and cannot substitute statutory execution mechanisms;
- - Payment made by the Corporate Debtor during pendency of the petition reduced the outstanding principal, and the claim for interest alone cannot sustain CIRP; and
- - The petition was thus not maintainable under Section 9 of the IBC.
Citing precedents including Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. and Swiss Ribbons Pvt. Ltd. v. Union of India, the Tribunal reiterated that CIRP proceedings are not meant to enforce debts where there exists a pre-existing dispute or where statutory execution procedures are prescribed.
Consequently, the Tribunal dismissed the petition, holding that the operational creditor's remedy lay in following the execution process under the MSME Facilitation Council Rules and pursuing breach of settlement claims under appropriate contractual dispute-resolution forums.
This judgment underscores the importance of adhering to prescribed statutory execution processes for MSME awards and clarifies that insolvency proceedings under Section 9 of the IBC cannot be invoked for recovery of time-barred debts or amounts governed by settlement agreements with specific dispute resolution clauses.
Bottom Line:
An operational creditor seeking recovery of an amount awarded by the MSME Council cannot invoke Section 9 of the Insolvency and Bankruptcy Code, 2016 for initiation of Corporate Insolvency Resolution Process when the invoices are time-barred and the award has not been executed through the prescribed procedure under MSME rules.
Statutory provision(s):
Section 9 of Insolvency and Bankruptcy Code, 2016; Section 5(21) of Insolvency and Bankruptcy Code, 2016; Rule 10 of Haryana Micro and Small Enterprises Facilitation Council (HMSEFC) Rules, 2021; Indian Partnership Act, 1932 (Chapter IV)
