“Not Filed To Harass Or Embarrass”: NCLAT Sets Aside Rejection Of Lyka Labs' CIRP Plea Against Modi Lifecare

The National Company Law Appellate Tribunal (NCLAT) at Delhi has held that Lyka Labs' insolvency plea against Modi Lifecare Industries was not an attempt to “harass and/or embarrass and/or humiliate” the company. The tribunal found that the petition was based on material facts and that Modi Lifecare had not disputed an operational debt exceeding ₹1 lakh.

A bench of Chairperson Justice Ashok Bhushan and Technical Members Barun Mitra and Arun Baroka set aside an Ahmedabad NCLT order rejecting Lyka Labs' Section 9 insolvency plea over unpaid royalty dues under a Technical Guidance Agreement.

The tribunal directed Modi Lifecare to deposit ₹63 lakh within 30 days, failing which the adjudicating authority may admit the company into insolvency proceedings.

“We further do not find that the appellant has filed the petition to harass and/or embarrass and/or humiliate the respondent, as the petition is based on material facts as noted by us here in. We find that the respondent has not disputed that there was a default of an operational debt which is in excess of Rs 1 lakh,” the tribunal ruled.

The dispute arose from a Technical Guidance Agreement executed on September 14, 2012. Under the agreement, Modi Lifecare agreed to pay a royalty to Lyka Labs for manufacturing products under its technical guidance.

The agreement provided for minimum guaranteed royalty payments, with a higher royalty payable if 5% of total sales exceeded the minimum amount. The payment schedule was later modified because of Modi Lifecare's financial difficulties.

According to Lyka Labs, Modi Lifecare failed to clear outstanding royalty dues despite repeated demands in 2017. In correspondence exchanged before the insolvency proceedings, Modi Lifecare acknowledged a liability of approximately ₹63 lakh.

However, Modi Lifecare maintained that royalty should be calculated only on actual sales rather than fixed minimum commitments under the agreement.

Lyka Labs subsequently issued a demand notice under Section 8 of the Insolvency and Bankruptcy Code. It then moved the NCLT under Section 9.

The Ahmedabad bench rejected the plea. It held that the demand notice was defective because invoices had not been annexed.

Before the appellate tribunal, Lyka Labs argued that the royalty obligation arose directly from the contract. It said invoices were not a precondition for establishing operational debt.

The company contended that Rule 5 of the IBBI rules permits issuance of a demand notice in Form 3 without annexing invoices. It also argued that Modi Lifecare's own correspondence acknowledging ₹63 lakh in dues was sufficient to establish default above the then applicable statutory threshold.

Modi Lifecare opposed the appeal. It argued that disputes over the royalty claim predated the demand notice.

The company said the parties had been operating on an understanding that royalty would be payable only on actual sales. It also argued that Lyka Labs had made inconsistent monetary claims over time, making the demand unreliable.

Modi Lifecare further contended that the insolvency process was being misused as a debt recovery mechanism. It said the claim arose from a contractual dispute and could not be treated as operational debt.

Rejecting the invoice objection, the NCLAT held that the technical guidance agreement itself created the liability. It said Lyka Labs was not required to raise invoices to make Modi Lifecare liable for minimum royalty payments.

“Further, the technical guidance agreement did not cast any liability upon the appellant to raise invoices upon the respondent for making it liable to pay the minimum royalty fees to the appellant. We therefore find that the contention that the demand notice was defective because invoices had not been annexed is incorrect, and the finding of the adjudicating authority relating to this issue cannot be sustained," the tribunal ruled.

The appellate tribunal held that the correspondence between the parties reflected account reconciliation rather than a pre-existing dispute that would bar insolvency proceedings.

The tribunal noted that Modi Lifecare had acknowledged the ₹63 lakh liability. Holding that debt and default stood established, it allowed the appeal and directed the deposit of the amount within 30 days.