NCLAT Sets Aside NCLT Order, Holds Insolvency Plea By Sole Proprietorship Maintainable Against Birla Jewels

The National Company Law Appellate Tribunal (NCLAT) Principal Bench at New Delhi has recently allowed an appeal filed by a sole proprietorship against rejection of its insolvency plea, holding that a Section 9 application under the Insolvency and Bankruptcy Code, 2016, is maintainable at the instance of a proprietorship concern.

The tribunal relied on earlier precedent to hold that proprietorship firms are competent to initiate corporate insolvency resolution process.

Setting aside an order of the National Company Law Tribunal (NCLT) Mumbai Bench, a bench of Judicial Member Justice Md. Faiz Alam Khan and Technical Member Naresh Salecha relied on its earlier decision in Unigold System v. Fortune Spirit Ltd. and quoted that "It is evident from Section 2(f) that proprietorship firms also can initiate CIRP proceedings,” and therefore a Section 9 application filed by a proprietorship concern cannot be rejected on the ground of maintainability.

The appeal was filed by Indu Jain, sole proprietor of IB Jewels, an operational creditor that had supplied rough and uncut diamond jewellery worth about Rs 49.81 lakh to Birla Jewels Ltd. in June 2019. After payment was not made, a demand notice under Section 8 of the Code was issued, following which the proprietorship filed a petition under Section 9.

The NCLT dismissed the petition holding that disputes arising out of a franchisee agreement between the corporate debtor and another proprietorship of the appellant constituted a pre-existing dispute. The adjudicating authority also held that a sole proprietorship was not a “person” under Section 3(23) of the Code, and therefore the petition was not maintainable.

Before the appellate tribunal, the appellant argued that the supply transaction was independent of the franchisee agreement and that the corporate debtor had not disputed delivery of goods in its reply to the demand notice.

The NCLAT noted that the corporate debtor had not denied the supply of goods in its reply to the Section 8 notice and that the defence of non-supply was raised only before the NCLT. The tribunal held that such a defense appeared to be an afterthought and could not be treated as a genuine pre-existing dispute.

Relying on Mobilox Innovations v. Kirusa Software, the tribunal reiterated that only a real dispute relating to the same transaction and existing prior to the demand notice can bar admission of a Section 9 petition and that disputes arising out of a separate contract cannot defeat an operational debt claim.

On maintainability, the tribunal held that the NCLT erred in rejecting the petition on the ground that it was filed by a proprietorship concern. Referring to its earlier ruling in Unigold System, the appellate tribunal held that the Code applies to proprietorship firms and that an application under Section 9 filed by a proprietor is maintainable.

It also held that a demand notice issued through an advocate on behalf of the operational creditor is valid.

"Thus, if a notice has been sent by a lawyer/attorney or by a legal firm on behalf of the OC the same would be sufficient having regard for initiation of proceeding under Section 9 of the Code."

Holding that the NCLT had erred on both counts, the NCLAT set aside the impugned order, restored the Section 9 petition to the file of the NCLT, and remanded the matter for fresh consideration in accordance with law.

Thus, the NCLT order was set aside and was remanded back.