Operational creditor's Section 9 application rejected due to unproven default and pre-existing service quality disputes

The NCLAT Principal Bench dismissed an appeal challenging rejection of a Section 9 application for initiating CIRP. The operational creditor failed to establish default as payment under Clause 17 of the work agreement was contingent upon the corporate debtor receiving corresponding payment from a third party, which was not proven. The creditor also failed to raise timely notice under Clause 18 and lacked the required Taking Over Certificate for final payment. The tribunal found pre-existing disputes regarding service quality evidenced by debit notes, concluding the corporate debtor's defense was substantiated. Since disputed operational debt cannot trigger Section 9 proceedings under IBC, the application was properly rejected.

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Issues Involved:
1. Whether operational debt had become due and payable.
2. Whether there was any default in payment by the Corporate Debtor.
3. Whether the debt was disputed.
4. Whether there was a pre-existing dispute between the parties.

Summary:

1. Operational Debt Due and Payable:
The Appellant, an Operational Creditor, claimed that the Corporate Debtor had engaged them for excavation and related services, and payments were made until 18.04.2018. An outstanding amount of Rs.1.58 crore remained unpaid, and a Section 8 demand notice was served on 30.07.2020, which the Corporate Debtor did not respond to. The Appellant filed a Section 9 application on 09.04.2021, which was rejected by the Adjudicating Authority.

2. Default in Payment:
The Respondent argued that no payment was due as per the Work Order Agreement dated 01.08.2014, which stipulated that payment to the Operational Creditor was contingent upon the Corporate Debtor receiving payment from HG Infra. Since HG Infra had not made any payment, the Corporate Debtor contended that no payment was due to the Operational Creditor.

3. Dispute of Debt:
The Respondent also claimed a dispute regarding the quality of work, which led to non-payment by the Agra Development Authority to HG Infra and subsequently to the Corporate Debtor. Debit notes amounting to Rs.1.24 crore were issued due to poor quality of services. The Adjudicating Authority found that there was a pre-existing dispute and rejected the Section 9 application.

4. Pre-existing Dispute:
The Tribunal examined Clauses 17 and 18 of the Work Order Agreement, which required payment to the Operational Creditor only after receipt of corresponding payment by the Corporate Debtor from HG Infra. The Tribunal found no evidence that such payments were received by the Corporate Debtor. The Tribunal also noted that the Operational Creditor did not raise a notice for claims within the stipulated time, and no "Taking Over Certificate" was placed on record.

Conclusion:
The Tribunal concluded that there was a pre-existing dispute regarding the quality of services provided by the Operational Creditor, supported by debit notes communicated via WhatsApp before the Section 8 demand notice. Citing the Mobilox judgment, the Tribunal held that the dispute was not spurious or frivolous, and thus, Section 9 proceedings could not be initiated. The appeal was dismissed, with the Tribunal affirming the Adjudicating Authority's decision to reject the Section 9 application on the grounds of a pre-existing dispute. The Appellant was advised to seek other remedies available under the law.

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