NCLAT sets aside Section 9 CIRP admission due to pre-existing disputes over faulty cables and non-supply

The NCLAT set aside the Adjudicating Authority's order admitting a Section 9 application for CIRP initiation. The tribunal found that pre-existing disputes existed between the operational creditor and corporate debtor regarding faulty cables and non-supply of goods. The corporate debtor's reply to the demand notice raised specific disputes including debit notes worth Rs.67,96,800/- for faulty cables and Rs.50,00,000/- for non-supply. Citing Supreme Court precedent, the NCLAT held that CIRP can only be triggered for undisputed debts, and dismissed the operational creditor's application, allowing the appeal.

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Issues Involved:
1. Pre-existing dispute between the parties.
2. Admissibility of Section 9 application under the Insolvency and Bankruptcy Code (IBC).

Summary:

1. Pre-existing dispute between the parties:
The Corporate Debtor, 'Dhanlaxmi Electricals Private Limited', issued a purchase order to the Operational Creditor for the supply of AB Cables. The Operational Creditor raised invoices from 29.09.2019 to 06.10.2019. On 04.08.2021, the Corporate Debtor's Account Manager sent an email pointing out discrepancies in the ledger. The Operational Creditor issued a demand notice on 25.08.2021 for Rs.1,79,93,691/- plus interest. The Corporate Debtor responded on 20.11.2021, raising disputes about faulty cables and non-supply of materials, issuing debit notes for Rs.67,96,800/- and Rs.50,00,000/-. The Corporate Debtor also made a payment of Rs.61,00,000/- after receiving the demand notice. The Tribunal found that the disputes were not frivolous and were supported by evidence, indicating a pre-existing dispute.

2. Admissibility of Section 9 application under the Insolvency and Bankruptcy Code (IBC):
The Operational Creditor filed a Section 9 application on 18.02.2023. The Adjudicating Authority admitted the application, despite the Corporate Debtor not filing a reply. However, the Tribunal noted that the Corporate Debtor had raised a dispute in its reply to the demand notice dated 20.11.2021. The Tribunal emphasized the statutory scheme under Sections 8 and 9 of the IBC, which requires the Adjudicating Authority to reject the application if a pre-existing dispute exists. The Tribunal found that the Adjudicating Authority failed to consider the full contents of the Corporate Debtor's reply and the evidence of disputes, including faulty cables and debit notes. Consequently, the Tribunal set aside the order admitting the Section 9 application, concluding that the disputes were not patently feeble or unsupported by evidence.

Conclusion:
The Tribunal allowed the appeal, set aside the Adjudicating Authority's order admitting the Section 9 application, and dismissed the application filed by the Operational Creditor. The IRP's fee and expenses were to be borne by the Operational Creditor, and parties were to bear their own costs.

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