Tribunal overturns admission of Section 9 application due to pre-existing disputes

The Tribunal found substantial pre-existing disputes between the Corporate Debtor and Operational Creditor regarding dues and necessary compliances, predating the Section 8 notice. The Adjudicating Authority's decision to admit the Section 9 application was deemed erroneous. Consequently, the Tribunal set aside the Impugned Order, releasing the Corporate Debtor from CIRP to operate independently. The Operational Creditor was directed to pay the Resolution Professional's fees/expenses and could pursue alternative legal remedies.

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Issues Involved:

1. Whether payment to the Operational Creditor was due from the Corporate Debtor.
2. Whether a default has been committed by the Corporate Debtor in respect of payment of operational debt.
3. Whether there was any pre-existing dispute raised during the stage of Section 8 Notice.

Summary:

Issue 1: Payment Due from Corporate Debtor
The Corporate Debtor, engaged in the business of restaurant/micro-brewery, entered into a Leave and License Agreement (LLA) and a Service Agreement (SA) with the Operational Creditor for the use of premises. The Operational Creditor claimed that the Corporate Debtor failed to pay rental dues and service charges amounting to Rs.7,66,52,157/-. The Corporate Debtor contended that the premises lacked requisite sanctions like Fire NoC and Occupancy Certificate, which prevented them from obtaining necessary licenses to operate their business. The Adjudicating Authority initially found that operational debt and default were established, but this was disputed by the Corporate Debtor.

Issue 2: Default in Payment of Operational Debt
The Corporate Debtor argued that due to the lack of requisite approvals from the Operational Creditor, they were unable to use the premises for the intended business, hence no payment was due. The Corporate Debtor consistently denied liability in their replies to notices and raised a counterclaim of Rs.7 crore. The Operational Creditor's failure to secure necessary compliances, according to the Corporate Debtor, absolved them from the obligation to pay under the LLA and SA.

Issue 3: Pre-existing Dispute
The Corporate Debtor highlighted a series of correspondences and notices, including arbitration notices, indicating long-standing disputes predating the Section 8 demand notice. The Tribunal referred to the Supreme Court's test in Mobilox Innovations Pvt. Ltd. Vs. Kirusa Software Private Limited, which emphasizes that the existence of a dispute must be pre-existing before the receipt of the demand notice. The Tribunal found that the Adjudicating Authority erred in not recognizing the pre-existing disputes and treating the defense of the Corporate Debtor as moonshine.

Conclusion:
The Tribunal concluded that there were real and substantial disputes between the parties regarding the dues and necessary compliances, which predated the Section 8 notice. The Adjudicating Authority's decision to admit the Section 9 application was erroneous. Consequently, the Tribunal set aside the Impugned Order dated 12.05.2022, released the Corporate Debtor from CIRP, and allowed it to function independently. The Operational Creditor was directed to pay the fees/expenses of the Resolution Professional. The Tribunal also clarified that the Operational Creditor could seek alternative legal remedies if desired.

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