NCLT rejects insolvency plea against Noida Metro Rail Corporation over pre-existing disputes

New Delhi: The NCLT has dismissed an insolvency petition filed by Empire Transport Services Ltd (ETSL) against Noida Metro Rail Corporation observing that there were 'genuine' pre-existing disputes between the parties over service quality, contractual obligations and payment deductions.

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The Allahabad Bench of NCLT rejected ETSL's plea seeking initiation of Corporate Insolvency Resolution Process (CIRP) against Noida Metro Rail Corporation (NMRC) under Section 9 of the Insolvency and Bankruptcy Code (IBC).

ETSL had approached the tribunal claiming operational dues of about Rs 7.09 crore arising from a bus operators agreement signed with NMRC on January 15, 2016.

As per the agreement, ETSL was to provide day-to-day running of 100 low-floor AC CNG buses in Noida, Greater Noida and the Noida–Greater Noida connectivity routes. However, only 50 buses were put in service instead of the agreed 100 buses.

ETSL had approached NMRC for plying of the rest 50 buses, but there was no response. Moreover, as per the terms and conditions of the agreement, NMRC was supposed to clear 50 per cent of the invoices within a week and balance in next 15 days from the date of receipt of invoice by NMRC.

The agreement provided that in case of a delay in payment, NMRC would be liable to pay compound interest at the rate of 9 per cent per day.

ETSL alleged it raised invoices between April 25, 2019 to March 16, 2020; however, no payment was released. Following this, it issued a notice under Section 8 of the IBC, claiming default and subsequently filed a petition against NMRC as an operational creditor.

This was defended by NMRC's counsel, Senior Advocate Sunil Fernandes and advocates Abhishek Prasad and Kaushlendra Nath Singh, before NCLT who argued that no payment default had occurred under the IBC.

They also argued that the operational creditor (ETSL) had repeatedly failed to provide services as per contractual specifications and had committed multiple breaches of the bus operators agreement, which was communicated through several show-cause notices.

They also submitted that the show-cause notices had also been placed before the Allahabad High Court in a writ petition filed by ETSL, which was dismissed on July 14, 2021, and consequently arbitration proceedings were initiated in the dispute.

Consenting to it, a two-member NCLT bench observed that the dispute between the parties was not merely about non-payment of dues but involved substantial disagreements regarding the quality of services provided by ETSL and the deductions imposed by NMRC under the contract.

It noted that NMRC had issued multiple show-cause notices, highlighting several deficiencies in service delivery, including malfunctioning GPS and passenger information systems, cracked windshields, defective handicap ramps, non-functional stop buttons, route deviations, inadequate fleet deployment, air-conditioning issues and lapses in statutory compliances such as EPF and ESI requirements.

Relying on the Supreme Court's landmark ruling in Mobilox Innovations Pvt Ltd vs Kirusa Software Pvt Ltd, the tribunal reiterated that an insolvency application cannot be admitted if a real and bona fide dispute existed prior to the issuance of the demand notice.

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The NCLT said that the disagreements concerning service standards, contractual performance, penalty deductions and reconciliation of accounts clearly constituted a "pre-existing dispute" within the meaning of the IBC.

"Accordingly, in view of the existence of a real and bona fide pre-existing dispute within the meaning of Section 5(6) of the Insolvency and Bankruptcy Code, 2016 and as has been settled by various judgments of the courts ...the present application filed under Section 9 of the Code does not merit admission and is, therefore, dismissed," said NCLT bench comprising members Ashish Verma and Praveen Gupta.

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