2023 (4) TMI 775 - AT - Insolvency and Bankruptcy

Appeal Dismissed: Pre-existing Dispute Bars Section 9 Application

Continuous Dyeing & Printing Mills Versus Bhavika Apparels Pvt. Ltd.

The appeal was dismissed, affirming the Adjudicating Authority's decision to reject the Section 9 application due to the existence of a genuine ... Maintainability of petition - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Operational Creditors - existence of debt and dispute or not - demand of service notice - HELD THAT:- Perusing the statutory construct of IBC post issue of demand notice by the Operational Creditor as laid down in Section 9 of IBC. Under Section 9(1), if the Operational Creditor does not receive payment from the Corporate Debtor or notice of the dispute under Sub-section (2) of Section 8, he may file an Application under Section 9(1) of the Code. It is also an undisputed fact in the present matter that the Operational Creditor did not receive any payment from the Corporate Debtor and therefore proceeded to file an application under Section 9 of IBC. From a plain reading of the above provisions, it is clear that with regard to an Operational Creditor, the existence of dispute and its communication to the Operational Creditor is therefore statutorily provided for in Section 8. In the present case, it is an undisputed fact that the demand notice was issued by the Operational Creditor on 16.09.2019 and notice of dispute raised by the Corporate Debtor on 27.09.2019 - since payments were not forthcoming, Section 8 demand notice issued on 16.09.2019 was followed by Section 9 application before the Adjudicating Authority. While admitting that the Corporate Debtor had raised disputes in their communication dated 23.08.2019, it was pointed out that the Adjudicating Authority failed to appreciate the fact that this communication had been triggered by the fact that the Corporate Debtor had been informed on 19.08.2019 that action would be initiated against them before the NCLT in case of non-payment. It has been clearly mentioned that there is a pre-existing dispute and that inspite of having pointed out these discrepancies, the operational creditor had continued to ignore the same and rejected the debit notes which has led to filing of a civil suit No.517/2019. It has been pressed in the said reply that the Civil Suit was filed before the receipt of the demand notice of the Operational Creditor and hence the demand notice is illusory and unwarranted having no legs to stand. In the present factual matrix, the defence raised by the Corporate Debtor therefore cannot be held to be moonshine, spurious, hypothetical or illusory. The tone and tenor of the letter dated 23.08.2019 clearly manifested existence of dispute prior to the date of Section 8 demand notice on 16.09.2019. 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. For such disputed operational debt, Section 9 proceeding under IBC cannot be initiated at the instance of the Operational Creditor. The Adjudicating Authority has therefore correctly noted that the application filed by the Operational Creditor under Section 9 has been hit by Section 9(5)(ii)(d) and accordingly rejected. The Adjudicating Authority did not commit any error in rejecting the Section 9 Application filed by the Appellant. There is no merit in the Appeal. Appeal is dismissed. Issues Involved:1. Pre-existing dispute regarding the quality of goods supplied.2. Validity of the demand notice under Section 8 of the Insolvency and Bankruptcy Code (IBC).3. Admissibility of the Section 9 application for initiation of Corporate Insolvency Resolution Process (CIRP).Summary:1. Pre-existing dispute regarding the quality of goods supplied:The appellant, an Operational Creditor, claimed that the Corporate Debtor had acknowledged the invoices and payments were made on a running account basis. However, the Corporate Debtor raised a dispute regarding the quality of the goods supplied on 23.08.2019, alleging that the fabric had 10% contraction instead of the required 18%, leading to losses. The Adjudicating Authority noted this dispute predated the Section 8 demand notice and was genuine, not fabricated to avoid liability.2. Validity of the demand notice under Section 8 of the Insolvency and Bankruptcy Code (IBC):The Operational Creditor issued a demand notice under Section 8 on 16.09.2019. The Corporate Debtor replied on 27.09.2019, asserting a pre-existing dispute and referencing a civil suit filed on 06.09.2019. The Adjudicating Authority observed that the civil suit, although initially dismissed, was restored and is still pending, validating the existence of a dispute.3. Admissibility of the Section 9 application for initiation of Corporate Insolvency Resolution Process (CIRP):The Adjudicating Authority found that the dispute raised by the Corporate Debtor was genuine and predated the demand notice. Under Section 9(5)(ii)(d) of the IBC, the existence of such a dispute precludes the initiation of CIRP. The application under Section 9 was therefore rejected. The Tribunal upheld this decision, noting that the defence raised was not spurious or illusory, and confirmed that the Operational Creditor could seek other remedies available under the law.Conclusion:The appeal was dismissed, affirming the Adjudicating Authority's decision to reject the Section 9 application due to the existence of a genuine pre-existing dispute. The Operational Creditor was advised to explore other legal remedies.