2018 (6) TMI 1697 - AT - Insolvency and Bankruptcy

Appeal allowed due to pre-existing dispute under Section 9. Corporate Debtor's right to dispute debt upheld.

The appeal was filed against the order admitting the application under Section 9 of the Insolvency and Bankruptcy Code. The Corporate Debtor had a ... Existence of a pre-existing dispute - operational creditor's application under Section 9 of the I&B Code - right to dispute the quantum of debt - effect of a disputed debt on 'default' and admissibility of Section 9 application - invalidity of interim measures taken pursuant to a wrongly admitted Section 9 applicationExistence of a pre-existing dispute - effect of a disputed debt on 'default' and admissibility of Section 9 application - There existed a pre-existing dispute as to the claim which precluded the finding of default and rendered the Section 9 application inadmissible. - HELD THAT: - Applying the principle that a corporate debtor may point out a pre-existing dispute which, if genuine, takes the operational creditor out of the Code's remedy, the Tribunal found that the corporate debtor had disputed the debt including its quantum. Emails exchanged between the parties (recorded at pages 62-69) showed negotiations on the amount payable since 7.10.2015 and an ultimate settlement for a lesser sum, which demonstrated that the question of liability/quantum was in issue prior to the Section 8 demand. Consequently, where the debt is disputed on bona fide grounds, the question of 'default' does not arise and the Section 9 petition could not have been admitted. [Paras 6, 7]Existence of a pre-existing dispute was established; therefore the Section 9 application could not be admitted.Operational creditor's application under Section 9 of the I&B Code - invalidity of interim measures taken pursuant to a wrongly admitted Section 9 application - The Adjudicating Authority's order admitting the Section 9 application, declaring moratorium, and appointing an Interim Resolution Professional was set aside and related actions were declared illegal. - HELD THAT: - Having determined that a pre-existing dispute existed and that parties had reached a settlement with part payment and delivery of a cheque for the balance, the Tribunal concluded that the impugned admission and consequential steps (appointment of Interim Resolution Professional, declaration of moratorium, freezing of accounts and any related actions such as advertisements) could not stand. The Tribunal set aside the Adjudicating Authority's order dated 24th May 2018 and directed that all consequential orders and actions be declared illegal and be quashed, and ordered closure of the proceedings before the Adjudicating Authority. [Paras 8, 9]Impugned order admitting the Section 9 petition and all consequential interim measures were set aside and declared illegal; the Section 9 application dismissed and proceedings closed.Right to dispute the quantum of debt - effect of a disputed debt on 'default' and admissibility of Section 9 application - The corporate debtor is entitled to dispute not only the existence but also the quantum of the claimed debt; a genuine dispute on quantum negates default. - HELD THAT: - Relying on the settled principle that a corporate debtor may dispute the 'debt' - which includes disputing the quantum claimed - the Tribunal held that such a dispute, when demonstrable by contemporaneous communications and negotiations, prevents the operational creditor from invoking Section 9. The factual record of negotiations and agreed lesser settlement established that the quantum was contested before initiation of the Section 9 process, thereby negating default. [Paras 6, 7]A bona fide dispute as to quantum existed and therefore default was not established for the purposes of Section 9.Invalidity of interim measures taken pursuant to a wrongly admitted Section 9 application - Directions as to restitution and limited costs were issued: payment to the Interim Resolution Professional and leave to approach the Tribunal in case of cheque dishonour. - HELD THAT: - While setting aside the admission and interim measures, the Tribunal provided consequential directions to address practical consequences: the corporate debtor was ordered to pay a specified fee towards the Interim Resolution Professional's costs within a fortnight. The Tribunal also preserved the 1st Respondent's remedy to approach the Tribunal in the event the cheque handed over for the balance is dishonoured, thereby enabling appropriate orders if the settlement fails to materialise. [Paras 10, 11]Corporate debtor to pay a resolution-fee sum to the Interim Resolution Professional; respondent may approach the Tribunal if the cheque is dishonoured.Final Conclusion: The appeal was allowed: the Tribunal concluded that a pre-existing dispute (including as to quantum) existed and therefore the Section 9 petition was wrongly admitted; the Adjudicating Authority's order admitting the petition, declaring moratorium and appointing an Interim Resolution Professional was set aside, the Section 9 application dismissed and related interim measures declared illegal, with limited consequential directions regarding payment to the Interim Resolution Professional and preservation of remedy in case of cheque dishonour. Issues:1. Admission of application under Section 9 of the Insolvency and Bankruptcy Code, 2016.2. Existence of dispute prior to the demand notice under Section 8(1).3. Settlement of dispute regarding the quantum of payment.4. Interpretation of provisions of Sections 7 and 9 of the I&B Code.5. Right of the Corporate Debtor to dispute the debt and quantum of payment.6. Consideration of emails exchanged between the parties as evidence of dispute.7. Setting aside the order of the Adjudicating Authority and passing directions.Analysis:1. The appeal was filed by a Shareholder and Director of the Corporate Debtor against the order admitting the application under Section 9 of the I&B Code. The Adjudicating Authority had passed an order of moratorium based on the application by the Operational Creditor.2. The Appellant argued that there was a pre-existing dispute before the demand notice under Section 8(1) was issued. The Corporate Debtor had replied to the demand notice, indicating the existence of a dispute.3. Both parties had differing views on the settlement of the dispute regarding the quantum of payment. The Corporate Debtor claimed that an agreed amount had been paid, while the Operational Creditor contended that the full brokerage fee had not been settled.4. The judgment referred to the Supreme Court's decision in Innoventive Industries v. ICIC Bank, outlining the procedures under Sections 7 and 9 of the I&B Code. It emphasized the importance of ascertaining the existence of a default and the right of the Corporate Debtor to dispute the debt.5. It was highlighted that in a petition under Section 9, the Corporate Debtor has the right to dispute not only the quality of goods or services but also the debt itself, including the quantum of payment. If the debt is disputed, the question of default does not arise.6. The emails exchanged between the parties were considered as evidence of the ongoing negotiation and dispute regarding the payment. The correspondence indicated that discussions had taken place on the amount payable, supporting the existence of a dispute.7. Ultimately, the order of the Adjudicating Authority was set aside, and directions were issued to dismiss the application under Section 9, release the Corporate Debtor from the moratorium, and allow it to function independently. The Corporate Debtor was also directed to pay certain fees and costs, with provisions for further action if the payment was not made.In conclusion, the judgment delved into the complexities of the dispute, the rights of the Corporate Debtor, and the procedural aspects under the I&B Code, ultimately leading to the setting aside of the initial order and providing detailed directions for the resolution of the matter.