2020 (2) TMI 1076 - Tri - Insolvency and Bankruptcy

Dismissal of Petition due to Unenforceable Agreement & Ineligible Debt under IBC

The Tribunal dismissed the petition as the agreement was not legally enforceable, and the debt did not qualify as operational under the IBC. Significant ... Maintainability of application - initiation of CIRP - Corporate Debtor defaulted in making repayment - existence of debt and default or not - whether debt, default in question is established without there being any dispute raised by the Respondent, in the light of pre-requisite conditions, as prescribed under section 9 of Code, under which the present Petition/Application is filed? Whether the basic document, on which entire cause of action arise is 'Firefly Agreement' dated 25th August, 2014(FF Agreement-RL-01 Linga-VFX & D Aging-Budget-Vo6) is an agreement enforceable under law or not? - HELD THAT:- There is no debt arise in the instant case basing on valid legal document. Moreover, whether the Adjudicating Authority being the Authority to examine the issue summarily, could not go into the details of the validity of the Agreement in question. Therefore, the validity of the Agreement can be examined by competent Civil Court, after adducing relevant evidence. Since the terms of Agreement are acted upon by the Parties and thus validity of it is no more re sintegra is not tenable. Whether the alleged debt in question is dispute or not? - HELD THAT:- The Code sections 3(6) 8B(11) of the Code, defined 'Claim and Debt. 'Debt' means a liability or obligation in respect of a claim, which is due from any person and includes a financial debt and operational debt; and 'claim' means- (a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured; (b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured - the right to claim, in the instant case, arise on the Agreement in question, which was not properly executed in accordance with law. It is a settled position of law that the provisions of the Code can be invoked where fundamental issues like debt, default, are not in dispute as it is summary proceedings in nature. Relevant issues to be examined in a Petition filed U/s 9 of the Code is whether there are debt and default in question and whether any pre-existing dispute is there or not. The Petitioner has failed to make out any case so as to initiate CIRP against the Respondent as prayed for - Petition dismissed. Issues Involved:1. Enforceability of the unstamped agreement.2. Existence of an operational debt.3. Pre-existing dispute regarding the debt.4. Solvency of the Corporate Debtor.5. Appropriateness of invoking CIRP under IBC, 2016.Issue-wise Detailed Analysis:1. Enforceability of the unstamped agreement:The primary issue was whether the 'Firefly Agreement' dated 25th August 2014 was enforceable. The Tribunal noted that the agreement was not properly stamped under either the Karnataka Stamp Act, 1957, or the Indian Stamp Act, 1899. The Tribunal emphasized that an agreement not duly stamped cannot be enforced in a court of law, although it can be used for collateral purposes. The Tribunal concluded that since the agreement was not legally enforceable, it could not serve as a basis for the claim.2. Existence of an operational debt:The Tribunal examined whether the debt in question qualified as an 'operational debt' under the Insolvency and Bankruptcy Code (IBC), 2016. The definition of 'debt' includes a liability or obligation in respect of a claim that is due from any person. The Tribunal found that the alleged debt arose from an agreement that was not legally enforceable and thus could not be considered a valid operational debt.3. Pre-existing dispute regarding the debt:The Tribunal noted that there was a significant dispute between the parties regarding the quality of services rendered and the payments due. The Respondent had raised issues about the quality and timeliness of the Petitioner's work, which allegedly resulted in financial losses. The Tribunal observed that these disputes were substantial and not merely feeble legal arguments. The existence of such disputes precluded the initiation of Corporate Insolvency Resolution Process (CIRP) under Section 9 of the IBC, 2016.4. Solvency of the Corporate Debtor:The Tribunal reviewed the financial status of the Corporate Debtor and found it to be solvent, with substantial assets and ongoing business operations. The balance sheet indicated significant assets and profits, suggesting that the Corporate Debtor was not in a position of insolvency. The Tribunal noted that the IBC is designed to address insolvency and not to serve as a debt recovery mechanism.5. Appropriateness of invoking CIRP under IBC, 2016:The Tribunal reiterated that the IBC is not intended to be a substitute for a debt recovery forum. It is meant to address cases of insolvency where there is a clear, undisputed debt. The Tribunal cited the Supreme Court's judgment in the case of Mobilox Innovations (P.) Ltd. v. Kirusa Software (P.) Ltd., emphasizing that the existence of an undisputed debt is a prerequisite for initiating CIRP. Given the disputed nature of the debt and the solvency of the Corporate Debtor, the Tribunal concluded that the Petitioner's application to initiate CIRP was not maintainable.Conclusion:The Tribunal dismissed the petition, stating that the Petitioner had failed to establish a clear, undisputed operational debt and that the agreement in question was not legally enforceable. The Tribunal also noted that the Corporate Debtor was solvent and that the IBC was not the appropriate mechanism for resolving the disputed claims. The Petitioner was advised to seek alternative legal remedies to address its grievances.