2019 (7) TMI 1259 - AT - Insolvency and Bankruptcy

Appellate Tribunal reverses decision on Insolvency application, stresses pre-existing dispute requirement

The Appellate Tribunal overturned the Adjudicating Authority's decision to reject an application under Section 9 of the Insolvency and Bankruptcy Code, ... Maintainability of application - Initiation of Corporate Insolvency Resolution Process - pre-existing dispute or not - Section 8(1) of the ‘I&B Code’ - HELD THAT:- In an application under Section 9, it is always open to the ‘Corporate Debtor’ to point out existence of dispute, if any. Such existence of dispute should be that of a period prior to the issuance of the demand notice under Section 8(1) of the ‘I&B Code’. In MOBILOX INNOVATIONS PRIVATE LIMITED VERSUS KIRUSA SOFTWARE PRIVATE LIMITED [2017 (9) TMI 1270 - SUPREME COURT], the Hon’ble Supreme Court held that the existence of the dispute and/or the suit or arbitration proceeding must be pre-existing – i.e. it must exist before the receipt of the demand notice or invoice, as the case may be. From the aforesaid decision, it is clear that the existence of dispute must be pre-existing i.e. it must exist prior to issuance of the demand notice or invoice. If it comes to the notice of the Adjudicating Authority that the ‘operational debt’ is exceeding ₹ 1 lakh and the application shows that the aforesaid debt is due and payable and has not been paid, in such case, in absence of existence of a dispute between the parties or the record of the pendency of a suit or arbitration proceeding filed before the receipt of the demand notice of the unpaid ‘operational debt’, the application under Section 9 cannot be rejected and is required to be admitted. It is clear that the claim means a right to payment even if it is disputed. Therefore, merely because the ‘Corporate Debtor’ has disputed the claim by showing that there is certain counter claim, it cannot be held that there is pre-existence of dispute - In the present case, there is no record to suggest pre-existence of dispute with regard to the services rendered by the Appellant, the application under Section 9 should not have been rejected by the Adjudicating Authority on the ground that the dispute about the quantum of payment cannot be determined. Case remitted to the Adjudicating Authority to admit the application under Section 9 after notice to the Respondent. Issues Involved:1. Pre-existing dispute regarding the debt.2. Adjudicating Authority's ability to investigate disputed claims.3. Conditions for admitting an application under Section 9 of the Insolvency and Bankruptcy Code, 2016.Issue-wise Detailed Analysis:1. Pre-existing Dispute Regarding the Debt:The core issue was whether there existed a pre-existing dispute regarding the debt claimed by the Operational Creditor. The Corporate Debtor argued that there were serious issues with respect to the engagement, which they communicated via email dated 27th February 2017. However, the Appellate Tribunal noted that this email did not relate to any pre-existing dispute and was an afterthought following the receipt of the Demand Notice under Section 8(1) of the I&B Code issued on 14th July 2017.2. Adjudicating Authority's Ability to Investigate Disputed Claims:The Adjudicating Authority (NCLT Bengaluru Bench) rejected the application on the grounds that it could not enter into an enquiry regarding the disputed claims due to the summary nature of proceedings under the IBC, 2016. The Tribunal emphasized that the issues should be decided based on principles of natural justice and that the parties should reconcile their accounts before invoking the provisions of the IBC. The Tribunal concluded that the debt in question was disputed and thus not fit for admission under Section 9.3. Conditions for Admitting an Application Under Section 9 of the Insolvency and Bankruptcy Code, 2016:The Appellate Tribunal referred to the Supreme Court's decision in 'Mobilox Innovations Pvt. Ltd. Vs. Kirusa Software (P) Limited' and 'Innoventive Industries Ltd. v. ICICI Bank and Anr.' to outline the conditions under which an application under Section 9 can be admitted. These include:- Existence of an operational debt exceeding Rs. 1 lakh.- Documentary evidence showing the debt is due and payable and has not been paid.- Absence of any pre-existing dispute or record of a suit or arbitration proceeding filed before the receipt of the demand notice.The Tribunal clarified that the existence of a dispute must be pre-existing, i.e., prior to the issuance of the demand notice or invoice. It further explained that a claim means a right to payment even if disputed. Therefore, the mere existence of a counterclaim by the Corporate Debtor does not constitute a pre-existing dispute.Conclusion:The Appellate Tribunal found no record suggesting a pre-existing dispute regarding the services rendered by the Appellant. It held that the application under Section 9 should not have been rejected by the Adjudicating Authority based on the dispute about the quantum of payment. The Tribunal set aside the impugned order dated 5th October 2018 and remitted the case to the Adjudicating Authority to admit the application under Section 9, with directions to notify the Respondent to provide an opportunity to settle the matter before admission. The appeal was allowed with these observations and directions, and no costs were imposed.