Insolvency Proceedings Can't Be Initiated By Operational Creditor When Complaints Regarding Defects Remain Unresolved: NCLT Delhi

Background Facts:

Schneider Electric India Pvt. Ltd. (“Operational Creditor”) is a prominent player in the Indian energy management market, offering integrated solutions across various sectors such as, industries, buildings, data centers, and residential segments. On the other hand, Sarkun Solar Pvt. Ltd. (“Corporate Debtor”) is engaged in the Production , collection and distribution of electricity.

The parties entered into 9 separate agreements for various projects across three districts in Punjab and the Operational Creditor was appointed as a contractor of the corporate Debtor. The of work included civil works along with Testing, Commissioning and supply of electrical equipment.

The Operational Creditor submitted that the total value of the contracts awarded across the various project components was ₹91,56,83,319/- However, the corporate debtor allegedly failed to release payments in accordance with the terms of agreements on multiple occasions, amounting to a breach of contract.

As a result, the Operational Creditor issued a demand notice to the Corporate Debtor seeking payment. However, the notice did not get delivered. Subsequently, the operational creditor invoked the Arbitration clause present in the agreement, but the arbitration notice also did not get delivered to the Corporate Debtor. Hence, the Operational Creditor sent another demand notice on the email address of the Corporate Debtor which was successfully delivered.

Contentions:

The Corporate Debtor contended that the Operational Creditor had failed to fulfill its contractual obligations and had delayed the execution of work. These concerns were raised several times prior to the issuance of demand notice, by the Corporate Debtor. However, the operational creditor did not take any step for the same.

It further submitted that it had also raised concerns regarding the defective quality of products supplied by the Operational Creditor. Despite these concerns, the Operational Creditor failed to rectify the defects in accordance with the contractual terms. Even after receiving a notice regarding overdue payments, the Corporate Debtor again informed the Operational Creditor about the unresolved defects.

In response, the Operational Creditor stated that no prior communication was made by the Corporate Debtor regarding any disputes and have been brought as a defence after the petition has been filed.

Findings:

The tribunal observed that the Corporate Debtor had raised issues relating to defective quality of products provided by the Operational Creditor, much prior to issuance of demand notice.

However, instead of addressing these issues, the Operational Creditor abandoned the project site without formally handing over the works, thereby aggravating operational disruptions and causing substantial and continuing revenue losses to the Corporate Debtor.

Furthermore, the Corporate Debtor has raised objections and communicated grievances on several occasions through email, detailing persistent technical issues and the resulting operational and financial impact. Despite this, the Operational creditor failed to take any remedial action and continued to raise demands for the alleged outstanding amount.

The Tribunal held that insolvency proceedings under Section 9 of the IBC cannot be initiated by the Operational Creditor when there exists a genuine pre-existing dispute concerning the quality of goods and services, especially when such issues had been raised prior to the issuance of the demand notice.

Case Title: Schneider Electric India Private Limited V/s M/s Sarkun Solar Private Limited

Case Number: CP (IB) No. 778 (ND)/ 2022

Judgement Date: 09.05.2025

For the Applicant : Ms. Geetali Hazarika, Adv.

For the Respondent : Mr. Sumesh Dhawan, Ms. Vatsala Kak, Mr. Raghav