NCLAT upholds rejection of insolvency petition as security deposit under letter of intent not operational debt under Section 5(21)

NCLAT dismissed the appeal challenging NCLT's rejection of section 9 application for CIRP initiation. The tribunal held that security deposit paid under letter of intent for future license agreement did not constitute operational debt under IBC Section 5(21), as no goods or services were supplied by either party. The deposit was merely to ensure license agreement execution, not linked to any service provision. Additionally, substantial pre-existing disputes between parties rendered the section 9 application non-maintainable per Mobilox Innovations precedent, which requires absence of disputes for operational creditor applications.

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Issues Involved:
1. Whether the claimed amount qualifies as an operational debt under the IBC.
2. Whether there exists a pre-existing dispute between the parties.

Summary:

Nature of the Debt:

The Appellant, Carestream Health India Private Limited, filed an appeal against the NCLT's order dismissing their application u/s 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) to initiate Corporate Insolvency Resolution Process (CIRP) against Seaview Mercantile LLP. The NCLT held that the Appellant did not qualify as an "Operational Creditor" because the claim did not arise from the provision of goods or services.

The Appellant argued that the security deposit paid under a "Without Prejudice" Letter of Intent (WP-LOI) for leasing premises should be considered an operational debt. They cited the Supreme Court's decision in Consolidated Construction Consortium Limited vs. Hitro Energy Solutions Private Limited, which held that advance payments for goods and services could be considered operational debt. However, the Tribunal found that the security deposit was not linked to the provision of goods or services but was a contractual obligation contingent upon executing a leave and license agreement. Therefore, it did not qualify as operational debt u/s 5(21) of the IBC.

Existence of Pre-Existing Dispute:

The Tribunal also examined whether a pre-existing dispute existed, which would render the application u/s 9 of the IBC non-maintainable. The Appellant and Respondent had conflicting versions of the WP-LOI, with discrepancies regarding IT/ITES usage and DOI certification. The Respondent claimed the right to forfeit the security deposit based on the Appellant's failure to execute the license agreement. The Appellant's actions, including attempts to obtain certification, contradicted their claim that the premises were unsuitable for IT/ITES purposes.

The Tribunal referred to the Supreme Court's guidance in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Ltd., which emphasized that IBC proceedings are not appropriate when a bona fide dispute exists. The Tribunal concluded that the substantial and documented disputes between the parties precluded the application under Section 9 of the IBC.

Conclusion:

The Tribunal upheld the NCLT's order, concluding that the claimed amount did not constitute an operational debt under the IBC and that a pre-existing dispute existed between the parties. The appeal was dismissed, and each party was directed to bear its own costs.

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