2022 (11) TMI 1010 - AT - Insolvency and Bankruptcy

Adjudicating Authority erred in admitting Section 9 application under Insolvency Code due to pre-existing disputes. Corporate Debtor released.

The Tribunal found that the Adjudicating Authority erred in admitting the Section 9 application under the Insolvency and Bankruptcy Code. It was ... Maintainability of petition - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Operational Creditors - existence of debt and dispute or not - service of demand notice as per Section 8 of IBC - HELD THAT:- A reading of Section 8 of IBC indicates that the requisite conditions necessary to trigger CIRP under Section 9 of the IBC are existence of a debt due and its default by the corporate debtor; that there has taken place delivery of demand notice of an unpaid and undisputed debt; that there has been no payment of the unpaid and undisputed debt within the period of 10 days of receipt of demand notice and no real pre-existing dispute is discernible. The Adjudicating Authority has held that there have been a number of communication exchanged between the operational creditor and corporate debtor which make it apparent that there “are certain strong differences” between the two. In other words, the Adjudicating Authority has endorsed that there has been dispute between the two parties on the claims amount. However, going ahead therefrom, the Adjudicating Authority has taken a conscious decision to further find out if any part of the liability on the part of the Corporate Debtor is undisputed and if the amount exceeded the threshold limit to qualify for admission of the Section 9 application. The provision under Section 8(2)(a) of IBC makes it clear that the Corporate Debtor has to bring to the Operational Creditor the fact of the existence of a dispute within ten days of the receipt of the demand notice. The Corporate Debtor in its reply on 29.06.2018 to the Section 8 notice dated 21.06.2018 has denied the claim raised by the Operational Creditor on the grounds that they are not legally due or payable besides making a mention of ongoing and unresolved disputes related to the debt amount that has been claimed. Where operational creditor seeks to initiate insolvency process against a Corporate Debtor, it can only be done in clear cases where no real dispute exists between the two which however is not so borne out by the facts of the present case. The Adjudicating Authority committed serious error in admitting Section 9 application in the facts of the present case. Appeal allowed. Issues Involved:1. Existence of a pre-existing dispute.2. Admission of debt and its default.3. Compliance with Section 8 and Section 9 of the Insolvency and Bankruptcy Code (IBC), 2016.4. Legal tenability of the Adjudicating Authority's decision to admit the Section 9 application.Detailed Analysis:1. Existence of a Pre-Existing Dispute:The core issue revolved around whether there was a pre-existing dispute between the parties before the delivery of the demand notice under Section 8 of the IBC. The Corporate Debtor had consistently communicated disputes regarding billing discrepancies, overcharges, and service disruptions. Emails dated 24.08.2017 and 13.10.2017 clearly indicated ongoing disputes and counterclaims for damages and business losses. The Adjudicating Authority acknowledged 'strong differences' between the parties but erroneously concluded that there was an undisputed liability exceeding the threshold limit.2. Admission of Debt and Its Default:The Adjudicating Authority found that the Corporate Debtor had admitted a debt of GBP 23,544.13 on 31.03.2017 and GBP 10,000 on 18.09.2017, which exceeded the threshold limit for initiating CIRP under Section 9 of the IBC. However, the Corporate Debtor had clearly disputed these amounts in subsequent communications, emphasizing overcharges and service disruptions. The Tribunal noted that the Corporate Debtor's acknowledgment of debt was conditional and accompanied by claims for damages, thus not constituting an unequivocal admission of liability.3. Compliance with Section 8 and Section 9 of the IBC:Section 8 of the IBC requires the operational creditor to deliver a demand notice to the corporate debtor, who must then respond within ten days, indicating either payment or the existence of a dispute. The Corporate Debtor, in its reply to the Section 8 notice, denied the claim and highlighted ongoing disputes. The Tribunal emphasized that the existence of a genuine dispute, as evidenced by extensive correspondence, precluded the admission of the Section 9 application. The Tribunal applied the test laid down by the Supreme Court in Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., which mandates rejection of the application if a plausible contention of dispute exists.4. Legal Tenability of the Adjudicating Authority's Decision:The Tribunal found that the Adjudicating Authority erred in admitting the Section 9 application. The existence of a pre-existing dispute was substantiated by voluminous correspondence, and the Corporate Debtor's defense was neither spurious nor illusory. The Tribunal reiterated that the IBC is not a debt recovery mechanism and should not be used to penalize solvent companies for disputed dues. The Tribunal set aside the impugned order, declared the initiation of CIRP illegal, and allowed the Corporate Debtor to function independently through its board of directors.Conclusion:The Tribunal concluded that the Adjudicating Authority had erroneously admitted the Section 9 application despite the existence of genuine pre-existing disputes. The Corporate Debtor was released from the rigors of CIRP, and the appeal was allowed with no order as to costs.