Court quashes insolvency process due to prior dispute between parties

The court allowed the appeal, quashing the order admitting the Insolvency Resolution Process under Section 9 of the Insolvency & Bankruptcy Code, 2016. The court found that a prior dispute existed between the parties before the initiation of insolvency proceedings, indicating that the proceedings should not have been admitted. Consequently, further proceedings based on the impugned order were stopped, with no costs imposed.

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Issues: Admission of Insolvency proceedings under Section 9 of the Insolvency & Bankruptcy Code, 2016 based on default claim by Operational Creditor. Existence of a prior dispute between parties before the initiation of insolvency proceedings.

The judgment pertains to an appeal filed against the admission of Insolvency proceedings under Section 9 of the Insolvency & Bankruptcy Code, 2016 (Code) by the Adjudicating Authority. The respondent, an Operational Creditor, initiated insolvency resolution against the appellant Corporate Debtor for an outstanding debt of Rs. 33.78 lakhs, including overdue interest, claiming default. The respondent had sent a Section 8 notice, to which the appellant replied raising a dispute based on earlier correspondence and a criminal complaint, asserting the amount was not yet due. Despite the appellant's contentions, the NCLT admitted the Insolvency Resolution Process, deeming the dispute raised as illusory and without merit.

During the appeal, both parties acknowledged a compromise had been reached, and necessary payments were made, including to the Insolvency Resolution Professional. However, the court emphasized that the compromise was irrelevant once the insolvency process had commenced, and the appeal needed to be considered on its merits. The appellant argued a prior dispute existed between the parties regarding a business understanding, alleging a violation of terms leading to the dispute. The respondent contended there was no written dealership agreement, but admitted to a dealer-principal relationship in their counter.

The court, after reviewing the arguments and evidence, agreed with the appellant's position that a prior existing dispute did indeed exist before the Section 8 notice was sent, indicating that the insolvency proceedings should not have been admitted. Consequently, the appeal was allowed, the order admitting the Insolvency Resolution Process was quashed, and further proceedings based on the impugned order were halted, with no costs imposed.

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