NCLAT Affirms Sole Proprietorships Can Initiate CIRP, Sets Aside NCLT Rejection in Birla Jewels Case

NCLAT Affirms Sole Proprietorships Can Initiate CIRP, Sets Aside NCLT Rejection in Birla Jewels Case

Introduction

The National Company Law Appellate Tribunal (NCLAT) has held that a sole proprietorship is competent to initiate insolvency proceedings under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC).

A Bench comprising Judicial Member Justice Md. Faiz Alam Khan and Technical Member Naresh Salecha set aside the order of the National Company Law Tribunal (NCLT), which had dismissed the insolvency application on grounds of maintainability and alleged pre-existing dispute.

Factual Background

The appeal was filed by Indu Jain, sole proprietor of IB Jewels, an operational creditor that had supplied rough and uncut diamond jewellery worth approximately ₹49.81 lakh to Birla Jewels Ltd in June 2019. Upon non-payment of dues, the appellant issued a demand notice under Section 8 of the IBC and subsequently filed an application under Section 9.

Procedural Background

The NCLT Mumbai dismissed the Section 9 application on two grounds:

• That a sole proprietorship is not a “person” under Section 3(23) of the IBC and hence cannot maintain an insolvency petition; and
• That a pre-existing dispute existed based on a franchisee agreement involving another proprietorship of the appellant.
• Aggrieved by this rejection, the appellant approached the NCLAT.

Issues

1. Whether a sole proprietorship is competent to file a Section 9 application under the IBC.

2. Whether disputes arising out of a separate contract can constitute a “pre-existing dispute” to bar insolvency proceedings.

3. Whether a defence raised belatedly can be treated as a genuine dispute.

Contentions of the Parties

The appellant contended that the supply transaction was independent of any franchisee agreement and that the corporate debtor had not disputed receipt of goods in response to the demand notice.

The respondent argued that disputes arising from a franchisee agreement constituted a pre-existing dispute and also challenged the maintainability of the petition filed by a proprietorship concern.

Reasoning and Analysis

The Tribunal held that a proprietorship concern is competent to initiate CIRP proceedings under the IBC, relying on its earlier decision in Unigold System v. Fortune Spirit Ltd., and clarified that such entities fall within the scope of “person” under the Code.

On the issue of dispute, the NCLAT observed that the corporate debtor had not denied supply of goods in its reply to the Section 8 notice and that the defence of non-supply was raised only at the stage of proceedings before the NCLT.

The Bench held that such a defence was an afterthought and did not constitute a genuine pre-existing dispute.

Relying on Mobilox Innovations v. Kirusa Software, the Tribunal reiterated that only real and substantive disputes, existing prior to issuance of the demand notice and directly relating to the transaction in question, can bar admission of a Section 9 petition.

It further clarified that disputes arising out of separate agreements cannot defeat a claim arising from an independent operational debt. The Tribunal also held that a demand notice issued through an advocate on behalf of the operational creditor is valid for initiating proceedings under the IBC.

Decision

The NCLAT set aside the impugned order of the NCLT Mumbai and restored the Section 9 application. The matter was remanded to the NCLT for fresh consideration in accordance with law.

In this case the appellant was represented by Advocates Gopal Machiraju, Krusha Maheshwari and Ruchi Wagaralkar. Meanwhile the respondent was represented by Advocates Honey Satpal, Akash Agarwalla, Pooja Singh, Sarng Pathak, Lalit Joshi and Aman.