NCLT Delhi: Termination of MOU After Invoice Issuance Cannot Defeat Operational Creditor's Claim Under IBC

1. Background and Parties

The New Delhi Bench of the National Company Law Tribunal was called upon to adjudicate a petition filed under Section 9 of the Insolvency and Bankruptcy Code, 2016, in the matter of Honest Machinery Pvt Ltd Vs VSM Venture Control Systems Private Limited [(IB) 939 (ND)/2020], decided on 24 December 2020. The petition sought initiation of the Corporate Insolvency Resolution Process against the corporate debtor on the ground that it had failed to discharge its operational debt.

The operational creditor, Honest Machinery Pvt Ltd, claimed a total outstanding amount of ₹1,11,82,688, which included interest of ₹11,15,564. The debt arose out of services rendered in the nature of liaising, designing, and consultancy in connection with a paper machinery revamping project in Iran, carried out pursuant to a Memorandum of Understanding dated 28 September 2017 executed between the two parties.

2. The Corporate Debtor's Defences

VSM Venture Control Systems Private Limited filed a detailed reply raising a wide range of objections, each seeking to either deny the debt or establish a pre-existing dispute. The principal defences put forward were as follows:

  • The operational creditor had originally been awarded a tender by Mazandaran Wood and Paper Industries Co. (MWPI) in Tehran, Iran, but owing to its alleged incapacity to secure the tender, it was cancelled and re-awarded directly to the corporate debtor.
  • Although a MOU dated 28 September 2017 was executed, the corporate debtor claimed it was never implemented and that the operational creditor had not performed even a minimal portion of the services envisaged under it.
  • The meetings with MWPI representatives were attended solely by the corporate debtor's directors, with the operational creditor playing no role in either award or execution of the contract.
  • Obligations relating to shipment charges under the MOU were to be borne by the operational creditor, but it failed to discharge them, forcing the corporate debtor to make those payments itself.
  • The MOU was formally terminated on 24 July 2018, communicated via email dated 26 July 2018, well before the demand notice was issued.
  • The invoices — described as bogus, fabricated, and false — were raised for three services (liaising, designing, consultancy) with no supporting evidence of actual performance.
  • The invoices dated 12 April 2018 and 9 April 2018 were never delivered to the corporate debtor.
  • The payment terms under the MOU were contingent upon receipt of payment from MWPI Iran, and no evidence had been placed on record to demonstrate that MWPI had in fact paid the corporate debtor; hence the claims were premature.
  • The invoices were billed to "Venture Control Systems Pvt Ltd," which did not match the corporate debtor's actual name, "VSM Venture Control Systems Pvt Ltd."
  • Under Section 37 read with Section 44 of the GST Act read with Rule 44 and Rule 59 of CGST Rules 2017, the operational creditor was legally obligated to file the invoices with the GST department to enable the corporate debtor to claim Input Tax Credit; this was not done, which the corporate debtor argued demonstrated that the invoices were never actually raised.
  • No Purchase Order was ever issued to the operational creditor, nor was any such document placed on record.
  • The demand notice under Section 8 of the Insolvency and Bankruptcy Code, 2016 was never received by the corporate debtor or any responsible officer thereof, and consequently no reply could be furnished within the stipulated period.

3. The Operational Creditor's Rejoinder

The operational creditor responded to each of the corporate debtor's contentions, emphasising the following: