Insolvency application quashed on appeal, Corporate Debtor released, Operational Creditor to pay costs

The appeal was allowed, and the order admitting the insolvency application under Section 9 of the Insolvency and Bankruptcy Code was quashed. The Corporate Debtor was released from the Corporate Insolvency Resolution Process, and the Operational Creditor was directed to pay the costs. The assets and records were to be handed over to the Corporate Debtor.

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Issues Involved:
1. Maintainability of the application under Section 9 of the Insolvency and Bankruptcy Code (IBC).
2. Existence of pre-existing dispute prior to the issuance of the Demand Notice.
3. Compliance with the provisions of the IBC regarding the delivery of demand notice and response by the corporate debtor.
4. Legal precedents regarding the existence of dispute and its impact on the insolvency application.

Detailed Analysis:

1. Maintainability of the Application under Section 9 of IBC:
The appeal arises from the order dated 28th May 2019, passed by the Adjudicating Authority (National Company Law Tribunal, Division Bench), Chennai, admitting the application filed by the 2nd Respondent under Section 9 read with Rule-6 of the Insolvency and Bankruptcy Code, 2016 (IBC). The appellant challenged this order, arguing that the application was not maintainable due to the existence of a dispute prior to the issuance of the Demand Notice by the 2nd Respondent.

2. Existence of Pre-Existing Dispute Prior to Issuance of the Demand Notice:
The key issue is whether there was a pre-existing dispute before the Demand Notice dated 04.12.2018. The Adjudicating Authority admitted the application based on Purchase Orders and a Memorandum of Understanding (MOU) dated 08.09.2018 between the Operational Creditor and the Corporate Debtor, which involved the supply of 64 Roof Top Units (RTUs) and additional materials. The Corporate Debtor had raised disputes regarding the quality and completion of the supply before the Demand Notice was issued.

3. Compliance with IBC Provisions Regarding Demand Notice and Response:
Section 8 of the IBC mandates that an operational creditor, upon the occurrence of a default, must deliver a demand notice to the corporate debtor. The corporate debtor must respond within ten days, indicating the existence of a dispute or repayment. In this case, the Corporate Debtor, through various correspondences and emails, had raised issues regarding incomplete supply and quality defects before the Demand Notice was issued. This was evidenced by a letter from Factum Law Advocates dated 13.11.2018 and an email from the Corporate Debtor dated 31.10.2018, highlighting deficiencies in the supplied materials.

4. Legal Precedents Regarding Existence of Dispute:
The Hon'ble Supreme Court in "Mobilox Innovations Pvt. Ltd. Vs. Kirusa Software (P) Limited – (2018) 1 SCC 353" established that the existence of a dispute must be pre-existing before the receipt of the Demand Notice. The Adjudicating Authority must reject the application if there is a pre-existing dispute. In this case, the correspondences and emails clearly indicated a pre-existing dispute regarding the quality and completion of the supply, aligning with the Supreme Court's ruling.

Conclusion:
The appeal was allowed, and the order dated 28th May 2019 was quashed and set aside. The Corporate Debtor was released from the rigors of the Corporate Insolvency Resolution Process (CIRP), and the Interim Resolution Professional/Resolution Professional was directed to hand over the assets and records to the Corporate Debtor/Promoter/Board of Directors. The Operational Creditor was held liable to pay the CIRP cost and fees of the Interim Resolution Professional/Resolution Professional. The appeal was disposed of with no order as to costs.

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