Operational debt and pre-existing dispute test upheld as CIRP was closed to end an insolvency deadlock

Contemporaneous acknowledgment of liability, dishonoured cheques and unanswered demand notice under the insolvency framework supported the existence of operational debt and default, while unsubstantiated allegations of delay and deficiency of service did not amount to a genuine pre-existing dispute. In the same matter, the ongoing CIRP was viewed as an unproductive stalemate because the sole CoC member sought withdrawal, no resolution plan had emerged, and the claimed costs were found disproportionate. The process was therefore closed in exercise of inherent powers in the interests of justice, and the appeal became infructuous.

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Issues: (i) Whether the operational creditor had established operational debt and default and whether any pre-existing dispute had been shown so as to sustain admission of the Section 9 application; (ii) Whether, in the peculiar facts, the ongoing CIRP should be closed in exercise of inherent powers because the sole CoC member wished to withdraw and the process had become an impasse.

Issue (i): Whether the operational creditor had established operational debt and default and whether any pre-existing dispute had been shown so as to sustain admission of the Section 9 application.

Analysis: The demand notice under Section 8 was issued and no notice of dispute was served by the corporate debtor within the statutory period. The record showed repeated emails acknowledging outstanding dues and assuring payment, along with issuance and dishonour of cheques, which supported the existence of an admitted operational debt and default. The alleged disputes regarding delay and deficiency of service were not substantiated by contemporaneous material and had not been raised before the demand notice, rendering them unconvincing as a pre-existing dispute.

Conclusion: The operational debt and default stood established, and the plea of pre-existing dispute failed; the admission of the Section 9 application was justified.

Issue (ii): Whether, in the peculiar facts, the ongoing CIRP should be closed in exercise of inherent powers because the sole CoC member wished to withdraw and the process had become an impasse.

Analysis: The sole CoC member had expressed a desire to withdraw under Section 12A, but the withdrawal could not be completed because of the CIRP expenses demanded. The proceedings had seen little effective progress, no resolution plan had emerged, and the costs claimed were found disproportionate to the claim amount and the work undertaken. In these circumstances, continuing the CIRP would only prolong a deadlock, and the Tribunal invoked its inherent powers to meet the ends of justice.

Conclusion: The CIRP was ordered to be closed and the corporate debtor was released from the rigours of insolvency proceedings; the appeal became infructuous.

Final Conclusion: The insolvency admission was found sustainable on merits, but the ongoing CIRP was terminated in the interests of justice, bringing the matter to a close and rendering the appeal infructuous.

Ratio Decidendi: For admission of an operational insolvency petition, contemporaneous acknowledgment of liability and absence of a genuine pre-existing dispute are sufficient, and where a CIRP has become an unproductive stalemate with withdrawal blocked by disproportionate costs, inherent powers may be invoked to close the process in the interests of justice.

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