2018 (10) TMI 1792 - AT - Insolvency and Bankruptcy

Tribunal overturns rejection of insolvency application due to Corporate Debtor's hypothetical objections

SUDHIR SALES & SERVICES LTD. Versus D-ART FURNITURE SYSTEMS PVT. LTD.

The Tribunal found that there was no pre-existing dispute between the parties before the demand notice was issued, as the objections raised by the ... Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of outstanding amount - application rejected on the ground of existence of dispute giving rise to the present appeal - HELD THAT:- It will be evident that the existence of a dispute or the record of the pendency of a suit or arbitration proceedings should be pre-existingi.e. prior to demand notice or invoice received by the Corporate Debtor. The moment there is existence of dispute, the Operational Creditor gets out of the clutches of the I&B Code. The Respondent- (Corporate Debtor) has not disputed the claim made by the Appellant- (Operational Creditor) nor raised any question relating to quality of service or material. There is no pre-existing dispute in the present case - Application admitted. Issues Involved:1. Existence of a pre-existing dispute.2. Quality of material supplied.3. Payment reconciliation and outstanding dues.4. Applicability and interpretation of Section 9 of the Insolvency and Bankruptcy Code, 2016.Detailed Analysis:1. Existence of a Pre-existing Dispute:The primary issue revolves around whether there was a pre-existing dispute between the Operational Creditor and the Corporate Debtor before the demand notice was issued. The Adjudicating Authority had rejected the application under Section 9 of the Insolvency and Bankruptcy Code, 2016 based on the existence of a dispute, citing letters dated 13th November 2013 and 9th September 2017.The Appellant argued that no such dispute existed and that the cited communications were unrelated or did not disclose any dispute. The Tribunal referred to the Supreme Court's judgment in Innoventive Industries Ltd. v. ICICI Bank and Anr., which emphasized that any dispute must predate the demand notice or invoice to be considered valid under the I&B Code.2. Quality of Material Supplied:The Corporate Debtor contended that the quality of the material supplied by the Operational Creditor was substandard, which was communicated through various letters. However, the Tribunal found that the letter dated 13th November 2013 did not raise any issues regarding the quality of the material or services provided. This letter only mentioned that the payment would be made after reconciliation and approval from a third party (M/S ESAJV D-Art India Pvt. Ltd.), and referenced an arbitration matter involving other parties, not the Operational Creditor.3. Payment Reconciliation and Outstanding Dues:The dispute over the payment reconciliation was another focal point. The total contract value was initially Rs. 1,62,49,360 and later increased to Rs. 1,93,20,620. The Appellant claimed that after accounting for credit notes, the net value of the invoices was Rs. 2,60,75,908, out of which Rs. 1,99,05,742 had been paid, leaving an outstanding amount of Rs. 61,70,161. The Corporate Debtor argued that excess payment had been made and that separate invoices for diesel were not in terms of the contract.The Tribunal noted that the dispute about the invoices and the quality of DG sets was raised for the first time in the letter dated 9th September 2017, which was in response to the demand notice under Section 8(1) of the I&B Code. This was considered an afterthought and not a pre-existing dispute.4. Applicability and Interpretation of Section 9 of the Insolvency and Bankruptcy Code, 2016:The Tribunal referred to the Supreme Court's ruling in Mobilox Innovations Pvt. Ltd. Vs. Kirusa Software (P) Limited, which clarified that the adjudicating authority must determine whether a plausible contention requiring further investigation exists, and not merely a spurious or illusory dispute. The Tribunal concluded that no genuine pre-existing dispute was present, and the objections raised by the Corporate Debtor were hypothetical and illusory.Conclusion:The Tribunal held that there was no pre-existing dispute and that the Adjudicating Authority had wrongly relied on the letters dated 13th November 2013 and 9th September 2017 to reject the application. The impugned order dated 24th April 2018 was set aside, and the case was remitted to the Adjudicating Authority for admission of the application under Section 9 of the I&B Code. The Corporate Debtor was barred from raising further objections before the Adjudicating Authority, although they could settle the claim with the Operational Creditor before the application's admission. The appeal was allowed with no order as to costs.