NCLAT upholds rejection of Section 9 IBC application due to genuine pre-existing dispute over operational debt

The NCLAT Principal Bench dismissed an appeal challenging rejection of a Section 9 IBC application for CIRP initiation. The operational creditor issued a demand notice on 15.12.2017, and the corporate debtor raised dispute notice on 26.12.2017, claiming breach of agency agreement due to CBI arrests of creditor's officials in March 2011 for illegal gratification. The corporate debtor terminated the agreement and withheld payments. The NCLAT held that a genuine pre-existing dispute existed before the demand notice, supported by consistent denial of liability and prior communications from 2015. The adjudicating authority correctly rejected the Section 9 application as the operational debt was legitimately disputed, not illusory or spurious.

---

---

Issues Involved:
1. Pre-existing Dispute
2. Termination of Agency Agreement
3. Validity of Section 9 Application

Summary:

Pre-existing Dispute:
The primary issue was whether there was a pre-existing dispute regarding the operational debt. The Appellant argued that there was no valid termination of the Agency Agreement and that the Adjudicating Authority erred in rejecting the Section 9 application on the grounds of pre-existing dispute. The Respondent contended that the Appellant breached clause 7 of the Agency Agreement, leading to the termination of the agreement and the withholding of payments related to SAD invoices. The Tribunal found that the Corporate Debtor had clearly articulated the existence of a dispute in their notice of dispute and that this dispute was not spurious, hypothetical, or illusory.

Termination of Agency Agreement:
The Appellant claimed that there was no documentary proof of the written termination of the Agency Agreement, which was a sine qua non for valid termination. They argued that the Respondent continued to avail services and made payments till 2014, indicating the continuation of the business relationship. The Respondent, however, provided evidence that the Agency Agreement was terminated due to the Appellant's breach, as some officials of the Appellant were arrested by the CBI for paying illegal gratification. The Tribunal noted that the termination of the Agency Agreement and the dispute over payments were well-documented and predated the demand notice.

Validity of Section 9 Application:
The Tribunal examined whether the Section 9 application was valid in light of the pre-existing dispute. It referred to the Mobilox judgment, which states that the Adjudicating Authority must reject a Section 9 application if there is a plausible contention of a dispute that requires further investigation. The Tribunal found that the Adjudicating Authority had correctly identified a pre-existing dispute and exercised caution in not adjudicating the legality of the termination of the Agency Agreement. The Tribunal upheld the Adjudicating Authority's decision to reject the Section 9 application, concluding that the operational debt was disputed and that the defense raised by the Corporate Debtor was not moonshine, spurious, hypothetical, or illusory.

Conclusion:
The appeal was dismissed, affirming the Adjudicating Authority's decision to reject the Section 9 application due to the pre-existing dispute between the parties. The Tribunal noted that the Appellant could resort to other remedies available under any other law.

---