CASE BRIEF: Mr. Shahi Md. Karim vs. Kabamy India LLP & Anr.

CASE NAME	Mr. Shahi Md. Karim vs. Kabamy India LLP & Anr.
CITATION	Company Appeal (AT) (CH) (Ins.) No. 16 of 2023
COURT	National Company Law Appellate Tribunal, Chennai
Bench	M. Venugopal
Date of Decision	15 January, 2023

Introduction

The case of Mr. Shahi Md. Karim vs. Kabamy India LLP & Anr. represents a critical development in India’s evolving insolvency jurisprudence. This appeal, adjudicated by the National Company Law Appellate Tribunal (NCLAT), delves into fundamental issues concerning procedural fairness and the rights of corporate debtors under the Insolvency and Bankruptcy Code (IBC), 2016.

The dispute arose from the initiation of a Corporate Insolvency Resolution Process (CIRP) against Lumiford Private Limited, wherein the National Company Law Tribunal (NCLT), Hyderabad Bench – I, admitted a Section 9 application filed by Kabamy India LLP, an operational creditor. The appellant, Mr. Shahi Md. Karim, a suspended director of the corporate debtor, challenged this order, citing concerns over due process, service of legal notices, and the applicability of an arbitration clause in the underlying commercial agreement.

The NCLAT’s decision in this case underscored the procedural framework governing insolvency proceedings, reaffirming the importance of fair opportunity and statutory compliance. By addressing contentions regarding notice periods, contractual dispute resolution mechanisms, and the nature of financial obligations, the tribunal’s ruling further clarified the principles of debt adjudication under the IBC, reinforcing transparency and legal certainty in India’s insolvency regime.

FACTS

The appellant, Mr. Shahi Md. Karim is the suspended director of Lumiford Private Limited, the corporate debtor in the present insolvency proceedings. The dispute arose from the initiation of the Corporate Insolvency Resolution Process (CIRP) against Lumiford following a Section 9 petition under the Insolvency and Bankruptcy Code (IBC), 2016, filed by Kabamy India LLP, an operational creditor. The case primarily concerns allegations of non-payment of outstanding dues, procedural lapses in the insolvency admission process, and the legal standing of arbitration clauses in insolvency matters.

On December 22, 2020, Lumiford entered into a Carrying and Forwarding Agreement (C&F Agreement) with Kabamy India LLP, appointing it as a distributor for its products. As part of this agreement, Kabamy India LLP deposited ₹2 crore as a security deposit. However, disputes arose when Lumiford requested the operational creditor to return the inventory stored in its Mumbai warehouse. The appellant claimed that the operational creditor failed to comply with this request, leading to a breakdown in their business arrangement. Despite these issues, Kabamy India LLP issued a payment notice on June 28, 2022, demanding settlement of alleged outstanding dues amounting to ₹3,12,81,028.

The corporate debtor responded on July 12, 2022, disputing the claims and asserting that the agreement contained an arbitration clause that should have been invoked before resorting to insolvency proceedings. Nevertheless, Kabamy India LLP proceeded with filing a Section 9 application before the National Company Law Tribunal (NCLT), Hyderabad Bench – I. The NCLT, after examining the records, found that there was no material evidence of payment by the corporate debtor nor any valid dispute raised under Section 8(2) of the IBC. Consequently, on January 5, 2023, the tribunal admitted the insolvency application, concluding that the corporate debtor had defaulted on its operational debt exceeding ₹1 crore.

Mr. Karim appealed against the order before the National Company Law Appellate Tribunal (NCLAT), arguing that the admission of CIRP was procedurally flawed, as he was not given sufficient opportunity to present his defense. He further contended that an arbitration mechanism was available under the contract and should have been exhausted before triggering insolvency proceedings. However, the NCLAT upheld the NCLT’s decision, ruling that the existence of an arbitration clause does not bar an operational creditor from initiating CIRP. The tribunal also held that the corporate debtor had failed to establish any legitimate dispute or demonstrate repayment, thereby justifying the admission of insolvency.

ISSUES

Whether the admission of the insolvency application under Section 9 of the Insolvency and Bankruptcy Code (IBC), 2016, was legally justified despite the existence of an arbitration clause in the C&F Agreement.
Whether the procedural conduct of the Corporate Insolvency Resolution Process (CIRP), particularly regarding notice, service of documents, and opportunity to respond, adhered to principles of natural justice and statutory requirements under the IBC.

ARGUMENTS FROM BOTH SIDES

Arguments by the petitioners

The petitioner contended that the Carrying and Forwarding Agreement (C&F Agreement) between the parties included a dispute resolution mechanism through arbitration, which should have been invoked before initiating insolvency proceedings under Section 9 of the Insolvency and Bankruptcy Code (IBC), 2016.
The petitioner argued that the National Company Law Tribunal (NCLT), Hyderabad Bench – I failed to ensure proper service of documents and did not provide adequate time for the corporate debtor to file a response before admitting the insolvency petition, thereby violating principles of natural justice.
The petitioner claimed that the alleged outstanding amount of ₹3,12,81,028 was not supported by proper documentation and that the corporate debtor had never acknowledged invoices raised by the operational creditor.
The petitioner asserted that Kabamy India LLP refused to vacate the premises even after multiple requests, making wrongful financial demands while failing to comply with its obligations under the agreement.

Arguments by the Respondents

The corporate debtor defaulted on an operational debt exceeding ₹1 crore. The respondent argued that the petitioner failed to make payments against valid invoices raised under the agreement, and despite multiple notices, no payments were made, satisfying the criteria for admission under Section 9 of the IBC.
The respondent contended that the presence of an arbitration clause does not prevent an operational creditor from initiating insolvency under IBC, as reaffirmed by judicial precedents. The default in payment constituted a valid ground for CIRP initiation.
The respondent asserted that the corporate debtor was duly served legal notices and had the chance to file counterarguments but failed to do so within the prescribed time, leading to the admission of the petition.
The respondent argued that the tribunal thoroughly examined the records, including the invoices and legal notices, and found that no legitimate dispute had been raised under Section 8(2) of the IBC.
The initiation of CIRP was necessary to protect creditors’ rights. The respondent maintained that the corporate debtor’s failure to clear outstanding dues warranted the intervention of the insolvency tribunal to ensure fair treatment of all stakeholders and prevent further financial deterioration of the corporate debtor.

DECISION

In Mr. Shahi Md. Karim vs. Kabamy India LLP & Anr., the National Company Law Appellate Tribunal (NCLAT) addressed significant concerns regarding procedural fairness, contractual obligations, and the applicability of arbitration clauses in insolvency proceedings under the Insolvency and Bankruptcy Code (IBC), 2016.

The tribunal upheld the decision of the National Company Law Tribunal (NCLT), Hyderabad Bench – I, which admitted the Section 9 application filed by Kabamy India LLP and initiated the Corporate Insolvency Resolution Process (CIRP) against Lumiford Private Limited. The NCLAT ruled that an arbitration clause in the Carrying and Forwarding Agreement (C&F Agreement) did not bar the operational creditor from initiating insolvency proceedings, as the IBC provides an independent remedy for debt resolution.

Further, the tribunal found no procedural irregularities in the admission of the insolvency application, stating that the corporate debtor had been duly served notices and provided opportunities to respond. It determined that the petitioner failed to raise a valid dispute under Section 8(2) of the IBC and did not provide evidence of payment for the claimed dues.

Based on these findings, the NCLAT dismissed the appeal, affirming that the CIRP initiation was justified. This decision reinforced the principle that arbitration clauses cannot circumvent insolvency proceedings under the IBC and emphasized the importance of adherence to procedural timelines in insolvency disputes.

CONCLUSION

The decision in Mr. Shahi Md. Karim vs. Kabamy India LLP & Anr. underscores the principles of procedural fairness, contractual obligations, and the autonomy of insolvency proceedings under the Insolvency and Bankruptcy Code (IBC), 2016. The National Company Law Appellate Tribunal (NCLAT) ruling reaffirmed that the existence of an arbitration clause does not preclude an operational creditor from initiating the Corporate Insolvency Resolution Process (CIRP). This highlights the IBC’s overriding objective of ensuring timely debt resolution, irrespective of parallel dispute resolution mechanisms.

A critical aspect of the case was the appellant’s contention that procedural lapses, including inadequate notice and denial of a fair hearing, violated natural justice principles. However, the tribunal found that the National Company Law Tribunal (NCLT) had adhered to procedural requirements, and the corporate debtor had been provided sufficient opportunity to respond. This reinforces the judiciary’s stance that compliance with procedural timelines is crucial in insolvency matters.

Furthermore, the ruling reiterates that operational creditors hold an independent right to invoke insolvency proceedings under Section 9 of the IBC and that insolvency mechanisms cannot be sidestepped through contractual clauses. By dismissing the appeal, the tribunal emphasized that corporate debtors must substantiate disputes with material evidence rather than rely on procedural technicalities to evade CIRP.

This case strengthens the legal framework surrounding insolvency law in India, reinforcing that the IBC prioritizes resolution over recovery and that insolvency proceedings must be conducted with transparency, fairness, and adherence to statutory provisions.