Adjudicating Authority's Error: Failure to Serve Notice Violates Natural Justice

The Appellate Tribunal found that the Adjudicating Authority erred in admitting the application under Section 9 of the Insolvency and Bankruptcy Code without issuing notice to the Corporate Debtor. It was established that there was a pre-existing dispute between the parties, which was not disclosed by the Operational Creditor. The failure to issue notice violated principles of natural justice. Consequently, the impugned order was set aside, and all actions taken by the Interim Resolution Professional were declared illegal. The Corporate Debtor was released from legal constraints, and the appeal was allowed without costs.

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Issues Involved:
1. Whether the Adjudicating Authority erred in admitting the application under Section 9 of the Insolvency and Bankruptcy Code, 2016 without issuing notice to the Corporate Debtor.
2. Whether there was a pre-existing dispute between the Operational Creditor and the Corporate Debtor.
3. The implications of the failure to issue notice on the principles of natural justice.
4. The validity of the actions taken by the Interim Resolution Professional following the impugned order.

Issue-wise Analysis:

1. Notice Requirement Under Section 9 of the Insolvency and Bankruptcy Code, 2016:
The appellant contended that the Adjudicating Authority (National Company Law Tribunal, New Delhi) admitted the application under Section 9 of the Insolvency and Bankruptcy Code, 2016 without issuing any notice to the Corporate Debtor. The Appellate Tribunal noted that in previous cases, such as "M/s. Innoventive Industries Limited v. ICICI Bank" and "M/s. Starlog Enterprises Limited vs. ICICI Bank Limited," it was established that the Adjudicating Authority is bound to issue a limited notice to the corporate debtor before admitting a case. This requirement is rooted in the principles of natural justice, which mandate that a party cannot be condemned unheard.

2. Pre-existing Dispute:
The appellant highlighted communications indicating a pre-existing dispute, including a letter dated 26th January 2018, where the Corporate Debtor claimed Rs. 51,80,211/- from the Operational Creditor due to delays and defects. This claim was reiterated in an email on the same date and further communications on 20th and 21st February 2018. The Appellate Tribunal found that these communications, which were suppressed by the Operational Creditor, demonstrated a pre-existing dispute regarding the delay in project delivery and defects in workmanship.

3. Principles of Natural Justice:
The Tribunal emphasized that the failure to issue notice to the Corporate Debtor before admitting the application violated the principles of natural justice. The Corporate Debtor was prejudiced by this omission, as it was deprived of the opportunity to present the pre-existing dispute and request the dismissal of the application. The Tribunal referenced the decision in "Sree Metaliks Limited & Ann" by the Hon'ble Calcutta High Court, which underscored the necessity of adhering to natural justice principles even when the statute is silent on the right of hearing.

4. Actions Taken by the Interim Resolution Professional:
Given the failure to issue notice and the existence of a pre-existing dispute, the Tribunal set aside the impugned order dated 14th November 2018. Consequently, all actions taken by the Interim Resolution Professional, including the appointment, declaration of moratorium, freezing of accounts, and advertisements calling for applications, were declared illegal and set aside. The Tribunal directed the Adjudicating Authority to fix the fee of the Interim Resolution Professional, which the Corporate Debtor (3rd Respondent) was ordered to pay for the period of service.

Conclusion:
The Tribunal allowed the appeal, set aside the impugned order, and dismissed the application under Section 9 of the Insolvency and Bankruptcy Code, 2016. The Corporate Debtor was released from all legal constraints and allowed to function independently through its Board of Directors. The appeal was allowed without any order as to costs.

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