Appeal dismissed as pre-existing dispute bars Corporate Insolvency Resolution Process initiation.

The tribunal dismissed the appeal, ruling that the pre-existing dispute raised by the Corporate Debtor barred the initiation of the Corporate Insolvency Resolution Process (CIRP) under Section 9 of the Insolvency and Bankruptcy Code. It was held that the dispute regarding liquidated damages was genuine and required adjudication by a competent judicial forum, thus rendering the CIRP initiation by the Operational Creditor unnecessary. The tribunal upheld the decision of the Adjudicating Authority without any costs awarded.

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Issues Involved:
1. Whether the dispute regarding liquidated damages raised by the Corporate Debtor was an afterthought, spurious, hypothetical, or illusory.
2. Whether the existence of a pre-existing dispute barred the initiation of the Corporate Insolvency Resolution Process (CIRP) under Section 9 of the Insolvency and Bankruptcy Code, 2016 (I&B Code).

Issue-wise Detailed Analysis:

1. Whether the dispute regarding liquidated damages raised by the Corporate Debtor was an afterthought, spurious, hypothetical, or illusory:

The appellant, an Operational Creditor, argued that the dispute regarding liquidated damages was an afterthought and spurious, designed to harass the appellant. The appellant contended that the Corporate Debtor never raised the issue of delay or liquidated damages during the fifteen revisions of the work orders, and the claim of liquidated damages could not be agitated after the release of two bank guarantees towards performance guarantee. The appellant also argued that no liquidated damage for any revision had been imposed or quantified during the revisions spanning from 2009 to 2015, and since a completion certificate had been issued unconditionally on 5th March 2015, the claim on account of liquidated damages could not lie.

Conversely, the Corporate Debtor submitted that the claim for liquidated damages was raised and discussed between the parties well before the issuance of the demand notice, constituting a pre-existing dispute. The Corporate Debtor argued that the completion certificate had nothing to do with the settlement of dues and that the parties were in dispute over the liability of the delay. The Corporate Debtor further contended that the release of bank guarantees did not amount to acceptance of the Operational Creditor’s claim and that the pending payment was subject to the decision on liquidated damages as per the agreement between the parties.

The tribunal noted that the Operational Creditor's letter dated 1st February 2017 indicated that the Corporate Debtor had staked its claim for liquidated damages under the 'LD Clause' and that the Operational Creditor resisted this on the grounds that the contract was extended periodically not due to any delay attributable to the Operational Creditor. The tribunal concluded that the Corporate Debtor had raised the issue of liquidated damages much prior to the service of the demand notice dated 3rd October 2017, and this dispute could not be considered spurious, hypothetical, or illusory.

2. Whether the existence of a pre-existing dispute barred the initiation of the Corporate Insolvency Resolution Process (CIRP) under Section 9 of the Insolvency and Bankruptcy Code, 2016 (I&B Code):

The tribunal emphasized that the existence of a pre-existing dispute is a bar to the initiation of CIRP at the instance of an Operational Creditor. The adjudicating authority is required to ascertain whether the Operational Creditor received the notice of dispute pursuant to the service of the notice of demand on the Corporate Debtor within the specified time or whether a dispute emerged from the record of information utility. The tribunal referred to the judgments in “Innoventive Industries Ltd. v. ICICI Bank” and “Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd.,” highlighting that the adjudicating authority must reject the application if there is a plausible contention requiring further investigation and the dispute is not patently feeble or unsupported by evidence.

In this case, the tribunal found that the issue of liquidated damages raised by the Corporate Debtor was a pre-existing dispute, as evidenced by the correspondence between the parties. The tribunal noted that the Work Order had been revised fifteen times, and the time schedule had been extended beyond proportion. The tribunal concluded that the dispute regarding liquidated damages was directly and proximately linked with the delay in the execution of the project, for which both parties blamed each other.

The tribunal held that the existence of a pre-existing dispute raised by the Corporate Debtor much prior to the service of the demand notice under Section 8(1) of the I&B Code required adjudication by a competent judicial forum and brought the case out of the clutches of CIRP. Therefore, the initiation of CIRP at the instance of the Operational Creditor was uncalled for and unwarranted.

Conclusion:

The tribunal dismissed the appeal, holding that the issue of pre-existing dispute raised by the Corporate Debtor barred the initiation of CIRP under Section 9 of the I&B Code. The tribunal concluded that the impugned order did not suffer from any legal infirmity or factual frailty and upheld the decision of the Adjudicating Authority. There was no order as to costs.

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