2024 (7) TMI 1004 - AT - Insolvency and Bankruptcy

NCLAT upholds dismissal of Section 9 application after operational creditor fails to prove debt and default

NCLAT Principal Bench dismissed appeal challenging rejection of Section 9 application for CIRP initiation. Adjudicating Authority found operational ... Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Applicability of Section 10A of the Insolvency and Bankruptcy Code (IBC) - whether any operational debt qua the Corporate Debtor has been proven to have become due and payable and if there has been a default in the payment thereof and whether there is any pre-existing dispute between the parties? - HELD THAT:- The Adjudicating Authority had applied its mind while considering the contention of the Appellant that the Respondent’s claim of payments having been made by them was false. However, this contention of the Appellant was not found sustainable by the Adjudicating Authority and held to be a mere sweeping statement by the Appellant for reasons of being unsubstantiated with supporting documents. It is also notice that the Adjudicating Authority has noticed contradiction in the pleadings made by the Operational Creditor with regard to outstanding payments and the ledger account of the Corporate Debtor maintained by the Operational Creditor in their books of account which reflect that payments have been made by the Corporate Debtor. In the absence of any credible proof put forth by the Operational Creditor to controvert the contention of the Corporate Debtor that the entire debt has been cleared and that there was no default, we have no reason to disagree with the above findings of the Adjudicating Authority that the allegations of debt and default raised by the Appellant is facile and lacks substance. The aim and objective of Section 10A was to protect a Corporate Debtor from the filing of any insolvency application against it for any default committed during the period when Covid-19 pandemic was prevailing - The Adjudicating Authority has opined that even though the invoice was issued one day prior to the commencement of prohibited period under Section 10A, it cannot escape the clutches of Section 10A since the date of issue of invoice cannot become the date of default since nothing has been placed on record by the Operational Creditor to show that the invoice had been delivered to the Corporate Debtor on the same date. Mere insertion of any date in the Section 8 demand notice or in the Section 9 application does not make that date of default valid and binding especially when there is no agreement between the two parties as to what shall constitute an event of default. In the absence of any agreement available on record, the alleged date of default cannot be whimsically and arbitrarily decided by the Operational Creditor. The Operational Creditor needs to be put to strict proof to establish the date of default. Neither in their pleadings nor in the course of oral arguments, any evidence has been placed on record by the Appellant to show how the default qua the third invoice did not arise during the Section 10A prohibited period. The debt and default above the threshold limit has not been established by the Appellant qua the Respondent - the Section 9 application has been filed with malicious intent to settle score between members of the family and not for the resolution of insolvency - the decision of the Adjudicating Authority rejecting the Section 9 application and imposing penalty of Rs. one lakh only upon the Appellant is affirmed - appeal dismissed. Issues Involved:1. Whether any operational debt qua the Corporate Debtor has been proven to have become due and payable.2. Whether there has been a default in the payment of the operational debt.3. Whether there is any pre-existing dispute between the parties.4. Applicability of Section 10A of the Insolvency and Bankruptcy Code (IBC) on the third invoice.5. Whether the Appellant was denied adequate opportunity to file their rejoinder and relevant material before the Adjudicating Authority.Detailed Analysis:1. Operational Debt and Default:The Appellant, an Operational Creditor, claimed that it had raised invoices aggregating Rs. 4.26 crore for civil construction work, out of which Rs. 2.05 crore was paid, leaving an outstanding amount of Rs. 2.83 crore. The Corporate Debtor, however, contended that all payments had been made either directly to the Operational Creditor or to their vendors and labourers. The Adjudicating Authority found that the Corporate Debtor had provided detailed submissions and bank statements to substantiate their claim of having cleared all payments. The Authority noted contradictions in the Operational Creditor's pleadings and ledger accounts, which reflected that payments had indeed been made. Consequently, the Authority concluded that the allegations of debt and default raised by the Appellant were unsubstantiated and lacked credible proof.2. Pre-existing Dispute:The Adjudicating Authority observed that there was a pre-existing dispute between the parties, particularly given the familial and business relationships involved. The Corporate Debtor argued that the three disputed invoices were not genuine and were raised by Sunil Kumar, a Director of the Operational Creditor, to unduly extract money following a family settlement. The Authority found merit in this argument, noting that the invoices were not supported by necessary documentation such as work orders, GST returns, or delivery challans.3. Applicability of Section 10A of IBC:The third invoice, dated 24.03.2020, was a critical point of contention. The Adjudicating Authority held that this invoice was hit by Section 10A of the IBC, which suspends the initiation of insolvency proceedings for defaults arising during the COVID-19 pandemic period. The Authority reasoned that even though the invoice was dated one day before the commencement of the prohibited period under Section 10A, the default could not be established as occurring on the same date. In the absence of any agreement or proof of immediate payment terms, the Authority inferred that the default would fall within the Section 10A period, thus barring the Section 9 application.4. Opportunity to File Rejoinder:The Appellant contended that it was denied the opportunity to file a rejoinder to the Corporate Debtor's reply. However, the Adjudicating Authority's interim orders indicated that both parties were given opportunities to file their written submissions. The Authority found no evidence of any infringement of the principles of natural justice, noting that the Appellant was represented by legal counsel in all hearings and had opportunities to present their case.Conclusion:The Adjudicating Authority concluded that the Appellant failed to establish debt and default above the threshold limit. The Section 9 application was deemed to have been filed with malicious intent to settle familial scores rather than to resolve insolvency. Consequently, the Authority affirmed the rejection of the Section 9 application and imposed a penalty of Rs. 1 lakh on the Appellant. The appeal was dismissed.