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 creditor failed to prove debt and default, noting contradictions between claimed outstanding amounts and corporate debtor's ledger showing payments made. Court held Section 10A of IBC protected corporate debtor from insolvency proceedings for defaults during COVID-19 prohibited period. Operational creditor could not establish valid default date or prove debt above threshold limit. Application deemed filed with malicious intent for family dispute settlement rather than genuine insolvency resolution. Penalty of Rs. one lakh imposed on appellant upheld.

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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.

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