2022 (9) TMI 1349 - AT - Insolvency and Bankruptcy

Adjudicating Authority rejects Section 9 application due to pre-existing disputes under Insolvency and Bankruptcy Code

The Adjudicating Authority rejected the Section 9 application under the Insolvency and Bankruptcy Code due to the presence of pre-existing disputes ... Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Operational Creditors - existence of debt and dispute or not - HELD THAT:- In the present case notice of demand was issued on 30.12.2019, hence, we proceed to examine the materials on the record before 30.12.2019 to find out was to whether there was any dispute raised by the Corporate Debtor regarding bills of the Appellant and further whether the dispute raised earlier was not existing on the date when Demand Notice was issued and has subsided as contended by leaned counsel for the Appellant - The Operational Creditor was put to notice that there is short supply of the Supervisor and Security Personnel under the contract which shall result in recovery from the payment and payments for the months mentioned therein has been released to mitigate the hardship of the employees which were released conditionally and all recoveries will be visited on conclusion of the contract. There are issues regarding releasing the final payment after observing the terms and conditions of contracts. The letter dated 20.12.2019 clearly communicated that issues regarding observing the terms and conditions of the contracts are yet not settled or decided and that was in process. The email further stated that Appellant is informed that ‘very shortly the aforesaid issues would be settled’. The above email does clearly belie the submission of the Appellant that before issuance of demand notice dated 30.12.2019 all the issues between the parties were settled. There are no substance in the submission of learned counsel for the Appellant that dispute, if any, existing earlier came to an end by the time Demand Notice was issued by the Appellant on 30.12.2019. The materials brought on the record before the Adjudicating Authority and also before us clearly indicate that there was pre-existing dispute with regard to payment of amount claimed by the Appellant and Appellant was duly communicated of the said dispute even prior to issuance of Demand Notice - No reliance on Minutes of Meeting dated 07.06.2019 be placed to accept the submission of Appellant that all the issues between the parties subsided and were settled and the reconciliation was complete. The Adjudicating Authority did not commit any error in rejecting the Section 9 Application filed by the Appellant on the ground of pre-existing dispute - Appeal dismissed. Issues Involved:1. Pre-existing dispute between the parties.2. Short supply of supervisors and security personnel.3. Application of Clause 25(a) of the NIT.4. Conditional release of payment.5. Reconciliation and finalization of bills.6. Invocation of arbitration clause.Issue-wise Detailed Analysis:1. Pre-existing Dispute Between the Parties:The primary issue in this case was whether there was a pre-existing dispute between the parties that would justify the rejection of the Section 9 application under the Insolvency and Bankruptcy Code (I&B Code). The Adjudicating Authority found that there were several communications (emails dated 14.12.2018, 11.02.2019, 15.02.2019, 26.02.2019, and 16.04.2019) from the Corporate Debtor to the Operational Creditor indicating disputes regarding short supply of supervisors and security personnel. These emails clearly communicated the existence of a dispute, which was never denied by the Operational Creditor. The Authority concluded that the existence of such disputes necessitated the rejection of the Section 9 application.2. Short Supply of Supervisors and Security Personnel:The Corporate Debtor had repeatedly informed the Operational Creditor about the short supply of supervisors and security personnel. Specific instances were highlighted in various emails, detailing the number of man-days where there was a short supply. For example, the email dated 14.12.2018 indicated a short supply of 54 man-days of supervisor category personnel and 465 man-days of security personnel in August 2018. Similar details were provided for other months as well. These communications were crucial in establishing that there was a consistent short supply, which was a point of contention between the parties.3. Application of Clause 25(a) of the NIT:Clause 25(a) of the Notice Inviting Tender (NIT) was invoked by the Corporate Debtor, which stated that in case of absenteeism, a penalty equal to double the wages of the absent personnel would be levied and deducted from the contractor's bills. The Corporate Debtor had communicated this to the Operational Creditor, indicating that recoveries would be made based on this clause. The Adjudicating Authority noted that the Operational Creditor was informed that recoveries would be visited on the conclusion of the contract, further supporting the existence of a pre-existing dispute.4. Conditional Release of Payment:The Corporate Debtor had conditionally released payments to the Operational Creditor to mitigate the hardship faced by the employees. For instance, the email dated 11.02.2019 mentioned that the final amount was being released conditionally to save the employees from facing hardships towards payment of their monthly wages. This conditional release was another indicator of the ongoing dispute regarding the final settlement of the bills.5. Reconciliation and Finalization of Bills:The Appellant claimed that the disputes were resolved in a meeting on 07.06.2019, where it was allegedly agreed to release an amount of Rs.1 Crore and to reconcile the remaining amount. However, the minutes of this meeting were not signed by any officials from the Corporate Debtor and were self-generated by the Appellant. The Corporate Debtor denied that any reconciliation or settlement occurred during this meeting. The Adjudicating Authority found that the minutes could not be relied upon to prove that the disputes were resolved.6. Invocation of Arbitration Clause:On 05.02.2021, the Corporate Debtor invoked the arbitration clause, further indicating the existence of unresolved disputes. The Corporate Debtor proposed three arbitrators, soliciting a response from the Operational Creditor. This invocation of arbitration was subsequent to the issuance of the demand notice and could not be relied upon to establish a pre-existing dispute. However, it reinforced the ongoing nature of the disputes between the parties.Conclusion:The Adjudicating Authority concluded that there was sufficient evidence of pre-existing disputes between the parties, which justified the rejection of the Section 9 application. The emails and communications from the Corporate Debtor to the Operational Creditor consistently highlighted issues of short supply and conditional payments, indicating unresolved disputes. The minutes of the meeting dated 07.06.2019 were not accepted as evidence of reconciliation. The invocation of the arbitration clause further supported the existence of disputes. Consequently, the appeal was dismissed, and the rejection of the Section 9 application was upheld.