2023 (1) TMI 1144 - AT - Insolvency and Bankruptcy

Appellate Tribunal overturns order, rules in favor of Corporate Debtor in insolvency case

Siraj Ali Patel Suspended Director, Swiss Entertainment Pvt. Ltd. Versus Epigram Through its Sole Proprietor Nabeel Abbas, Swiss Entertainment Pvt. Ltd.

The Appellate Tribunal set aside the Adjudicating Authority's order admitting the Section 9 application under the Insolvency and Bankruptcy Code, ruling ... Initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Operational Creditor - pre-existing dispute or not - Appellant has contended that the Section 9 application was wrongly admitted by the Adjudicating Authority on the sole ground that there was no ground for pre-existing dispute between the parties though there was strict evidence proving the contrary and that aggrieved by the impugned order. Whether the operational debt claimed by the Operational Creditor was admitted by the Corporate Debtor as due and payable and not surrounded by pre-existing disputes? HELD THAT:- The Adjudicating Authority while noting that the Corporate Debtor has denied their obligation to pay pending dues to the Operational Creditor, it has further held that the disputes raised by the Corporate Debtor in denying the claims is an after-thought and that there is no evidence presented to demonstrate their dissatisfaction with the work done by the Operational Creditor. The very fact that the Operational Creditor had issued a Legal Notice is suggestive of a pre-existing dispute between the two parties. That the contentions raised in the Legal Notice were countered by the Corporate Debtor reinforces the existence of dispute between the parties. It is also pertinent to note that the Legal Notice was issued much before the issue of Demand Notice. That the reply to Legal Notice clearly predates the Section 8 Demand Notice by nearly five months has somehow managed to escape the attention of the Adjudicating Authority. Thus to hold that the disputes raised in the reply to the Legal Notice is an ‘after-thought’ is fallacious and hopelessly misplaced on the part of the Adjudicating Authority. It is well settled that in Section 9 proceeding, there is no need to enter into final adjudication with regard to existence of dispute between the parties regarding operational debt. What has to be looked into is whether the defence raises a dispute which needs further adjudication by a competent court. The Corporate Debtor having raised genuine disputes in their detailed replies to the Legal Notice and the Demand Notice, the Adjudicating Authority ought not to have admitted the Section 9 application - the impugned order are set aside - appeal allowed. Issues Involved:1. Admission of Section 9 application under IBC.2. Pre-existing dispute between the parties.3. Quality of services provided by the Operational Creditor.4. Legality of demand notice under Section 8 IBC.5. Adjudicating Authority's decision and its validity.Detailed Analysis:1. Admission of Section 9 Application under IBC:The appeal was filed under Section 61 of the Insolvency and Bankruptcy Code, 2016 (IBC) against the order dated 14.10.2022 by the Adjudicating Authority (National Company Law Tribunal, Mumbai Bench, Court-II) which admitted the Section 9 application filed by the Operational Creditor and initiated Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor. The appellant, a suspended director of the Corporate Debtor, contested this admission.2. Pre-existing Dispute Between the Parties:The Corporate Debtor argued that there was a pre-existing dispute regarding the quality of services provided by the Operational Creditor. The Operational Creditor had been reminded several times about the shortcomings in their service, including poor quality of printing and delays in delivery, which hampered the marketing of the film 'Haseena Parker.' The Corporate Debtor also accused the Operational Creditor of hijacking their digital account credentials. These disputes were communicated before the issuance of the statutory demand notice under Section 8 of IBC, indicating the presence of a pre-existing dispute.3. Quality of Services Provided by the Operational Creditor:The Operational Creditor claimed the total outstanding payment due from the Corporate Debtor amounted to Rs.55,38,347/-. They contended that all printing jobs were done as per the requirements of AA Films, the distributor of 'Haseena Parker,' and their work was appreciated by the film's Director. The Corporate Debtor, however, maintained that the work was unsatisfactory and that they were not liable to pay the claimed amount. The engagement letter stipulated that the work had to be performed to the satisfaction of the Producer, not a third party.4. Legality of Demand Notice under Section 8 IBC:The Corporate Debtor contested the demand notice issued under Section 8 of IBC, claiming it was defective as it did not specify the date of default or provide a detailed explanation of how the debt became due. The Operational Creditor countered that the date of default was clearly indicated on each invoice incorporated in Part IV of Form 5. The Corporate Debtor's failure to repay the outstanding amount was deemed baseless and unsubstantiated.5. Adjudicating Authority's Decision and its Validity:The Adjudicating Authority admitted the Section 9 application on the ground that there was no pre-existing dispute. However, the Appellate Tribunal found that the Corporate Debtor had raised genuine disputes regarding the quality of services and the hijacking of social media accounts. The Tribunal referred to the Supreme Court's decision in Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., which states that if a plausible contention requiring further investigation exists, the application under Section 9 must be rejected. The Tribunal concluded that the disputes raised by the Corporate Debtor were not spurious or illusory and required adjudication by a competent court.Conclusion:The Appellate Tribunal set aside the order dated 14.10.2022 passed by the Adjudicating Authority, which initiated CIRP against the Corporate Debtor. The Tribunal found that the Corporate Debtor had raised genuine disputes in their replies to the Legal Notice and the Demand Notice, and therefore, the Section 9 application should not have been admitted. The Corporate Debtor was released from the rigours of CIRP with immediate effect. The appeal was allowed with no costs.