2021 (11) TMI 613 - AT - Insolvency and Bankruptcy

Tribunal overturns rejection of insolvency application due to lack of pre-existing dispute.

The Tribunal concluded that there was no pre-existing dispute when the Demand Notice under Section 8 was issued. The Adjudicating Authority's rejection of ... Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Operational Creditors - existence of pre-existing dispute when Notice under Section 8 was issued - HELD THAT:- Sub-section (2) of Section 8 obliges the Corporate Debtor who has been delivered a Demand Notice under Section 8(1) by Operational Creditor to bring into notice of the Operational Creditor “existence of a dispute, if any, or record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute” - reply as required under Section 8(2), it is incumbent on Corporate Debtor to bring into the notice to the Operational Creditor ‘existence of a dispute’. Although notice under Section 8(1) was replied by the Corporate Debtor vide email dated 04.02.2019 as extracted above, but there is no mention of existence of a dispute. Rather the reply dated 04.02.2019 reiterate that the Respondents are ready to make the payment as per their revised plan communicated on 30.01.2019. There is a statutory purpose for requiring a Corporate Debtor to bring into notice of the Operational Creditor about the existence of a dispute in its reply to Section 8(1) notice. The purpose is that if there is a dispute in existence, the same may be immediately communicated to the Operational Creditor so that he may chart his course of action. When no mention of existence of dispute is made by the Corporate Debtor, the Operational Creditor can immediately file Application under Section 9 which has been done in the present case by Operational Creditor. In the present case, no notice of dispute has been received by the Operational Creditor as noted above. There is another expression in clause (d) noted above that ‘there is a record of dispute in the information utility’, the present is also not a case where there is record of any dispute in the information utility nor any such pleading or material has been placed before us. The very basis on which the Adjudicating Authority rejected the Application is not in existence. There being no pre-existing dispute between the parties, the Adjudicating Authority ought to have admitted the Application and proceeded with the Corporate Insolvency Resolution Process - The receipt or acknowledgment of the said debit notes has also been denied. It is not necessary for us to pronounce as to whether the debit notes are forged or manufactured for the purposes of this case, since the very basis of the decision of Adjudicating Authority was the existence of dispute. Application of the Operational Creditor filed under Section 9 stands admitted and the Adjudicating Authority is directed to proceed with. The Corporate Insolvency Resolution Process shall be deemed to have commenced from this date. Issues Involved:1. Whether there was a pre-existing dispute when the Notice under Section 8 was issued.2. Whether the Adjudicating Authority erred in rejecting the Application under Section 9 of the Insolvency and Bankruptcy Code, 2016.Issue-wise Detailed Analysis:1. Pre-existing Dispute:The core issue under consideration was whether a pre-existing dispute existed when the Operational Creditor issued the Notice under Section 8 of the Insolvency and Bankruptcy Code, 2016. The Adjudicating Authority rejected the Application based on emails dated 04.05.2018 and 30.07.2018, which allegedly indicated quality issues with the gelatine supplied. However, the Tribunal found that these emails did not constitute a substantial dispute. The email dated 30.07.2018 mentioned that the quality of the gelatine was good, with only a minor issue of wooden chips in the bags, which was to be addressed in future supplies. The Tribunal emphasized that a real dispute involves a conflict or controversy, which was not evident in this case. The Corporate Debtor's acknowledgment of debt in the meeting on 27.07.2018 and subsequent communications further negated the existence of any substantial dispute.2. Error in Rejecting the Application:The Tribunal examined whether the Adjudicating Authority erred in rejecting the Application under Section 9. The Operational Creditor had issued a Demand Notice under Section 8, to which the Corporate Debtor responded without mentioning any pre-existing dispute. The Tribunal highlighted the statutory purpose of requiring the Corporate Debtor to notify the Operational Creditor of any existing dispute in its reply to the Section 8 notice. The absence of such a mention allowed the Operational Creditor to proceed with filing the Application under Section 9. The Tribunal referred to the Supreme Court's judgment in 'Mobilox Innovations Private Limited vs. Kirusa Software Private Limited' to underline that the Adjudicating Authority must determine the existence of a dispute before rejecting an Application under Section 9. The Tribunal found that the Adjudicating Authority had relied on emails that did not indicate a real dispute and failed to acknowledge the repeated admissions of debt by the Corporate Debtor.Conclusion:The Tribunal concluded that there was no pre-existing dispute when the Demand Notice under Section 8 was issued. The Adjudicating Authority's rejection of the Application under Section 9 was based on an incorrect assumption of a dispute. The Tribunal set aside the impugned order and directed the Adjudicating Authority to admit the Application and proceed with the Corporate Insolvency Resolution Process. The Tribunal's decision emphasized the importance of clear and substantial evidence of a dispute to reject an Application under Section 9.