Why Section 9 of IBC Isn’t Your Solution for Debt Recovery?
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However, recent legal interpretations have made it clear that applications under Section 9 of IBC cannot be filed solely for the recovery of dues. The focus is on insolvency resolution, not as a tool for creditors looking to recover money, which falls under a different judicial framework.
Purpose and Scope of Section 9 of IBC
The IBC was enacted to provide a systematic approach to insolvency and bankruptcy in India, aiming to assist creditors by ensuring timely resolution of insolvency cases. Section 9 of IBC is primarily directed at the initiation of the Corporate Insolvency Resolution Process (CIRP) by operational creditors against a corporate debtor for non-payment of “operational debts” like those for goods or services. Its role is thus confined to insolvency resolution, not as a mechanism for simple debt recovery.
In several landmark cases, such as Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd., the adjudicating authority clarified that Section 9 of IBC is not meant to serve as a “recovery forum” for unpaid dues. Instead, it is intended for situations where the corporate debtor is genuinely insolvent and incapable of paying its operational debts.
The authority underscored that the objective of IBC is to safeguard the overall financial stability of corporations rather than allow creditors to employ it as a tool to extract payments, often described as “debt collection” attempts, which could disrupt corporate stability.
Case Analysis: M/s Agarwal Foundries Pvt. Ltd. v. POSCO E&C India Pvt. Ltd.
On September 10, 2024, the National Company Law Appellate Tribunal (NCLAT) in M/s Agarwal Foundries Pvt. Ltd. v. POSCO E&C India Pvt. Ltd. reaffirmed that applications under Section 9 of IBC cannot be utilized for recovery actions. This case reiterates the intention of Section 9 of IBC to address insolvency, not as a method for operational creditors to recover dues.
Facts of the Case
In this case, the appellant, M/s Agarwal Foundries Pvt. Ltd., supplied TMT bars to a contractor on the instruction of POSCO E&C India Pvt. Ltd. However, the payment remained unpaid, and M/s Agarwal sought to recover these dues by filing an application under Section 9 of IBC against POSCO.
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