NCLAT sets aside insolvency proceedings after finding pre-existing operational debt disputes precluded Section 9 initiation

NCLAT Principal Bench set aside the initiation of CIRP against the corporate debtor, finding that pre-existing disputes regarding operational debt precluded Section 9 proceedings. The tribunal held that the corporate debtor had raised plausible disputes within the statutory timeframe after receiving the demand notice, which were central to the claimed payments. The adjudicating authority erred in not properly evaluating these disputes' plausibility as required under Mobilox judgment. Since disputed operational debt cannot trigger CIRP proceedings, the corporate debtor was released from insolvency proceedings with immediate effect.

---

---

Issues Involved:
1. Existence of operational debt and default by the Corporate Debtor.
2. Admissibility of welfare claims as operational debt.
3. Pre-existing disputes between the parties.
4. Application of set-off/counter-claims by the Corporate Debtor.
5. Compliance with statutory requirements under Sections 8 and 9 of the IBC.

Detailed Analysis:

1. Existence of Operational Debt and Default by the Corporate Debtor:
The Appellant argued that there was no admitted, crystallized operational debt due to Respondent No. 2. It was contended that the sums claimed by Respondent No. 2 were not in accordance with the Employment Agreement (EA) and that Respondent No. 2 had already received advance payments exceeding his entitlements. The Adjudicating Authority, however, found that the Corporate Debtor had admitted a liability of Rs. 4.18 lakhs as salary and Rs. 24.44 lakhs towards Provident Fund (PF) dues in its balance sheet, thus establishing the existence of a debt above the pecuniary threshold of Rs. 1 lakh. The Authority held that the Corporate Debtor had not provided conclusive evidence to show that these amounts had been paid, thereby confirming default.

2. Admissibility of Welfare Claims as Operational Debt:
The Appellant contended that welfare claims such as PF, Gratuity, and other benefits do not qualify as operational debt and cannot be the basis for initiating CIRP. The Respondent No. 2 argued that these claims were part of the EA and thus payable. The Tribunal referred to the judgment in Kishore K. Lonkar Vs. Hindustan Antibiotics Ltd., which held that welfare claims do not constitute operational debt under the IBC. The Tribunal agreed with this interpretation, noting that such claims cannot be the basis for CIRP.

3. Pre-existing Disputes Between the Parties:
The Appellant argued that there were pre-existing disputes regarding the claims made by Respondent No. 2, which were communicated through emails and other correspondence before the issuance of the Section 8 demand notice. The Adjudicating Authority, however, found that no valid disputes were raised before the statutory demand notice. The Tribunal disagreed, finding that the Corporate Debtor had raised detailed disputes about the mismanagement and financial crisis caused by Respondent No. 2, which were communicated prior to the demand notice. These disputes were central to the claims made by Respondent No. 2 and indicated that the debt was not undisputed.

4. Application of Set-off/Counter-claims by the Corporate Debtor:
The Adjudicating Authority held that the Corporate Debtor's claim of set-off/counter-claims was not sustainable under the summary jurisdiction of the IBC. The Tribunal, however, found that the Corporate Debtor's contention that Respondent No. 2 had received more than his entitlement as per the EA was not merely a set-off claim but a valid defense against the claims made. The Tribunal noted that the Adjudicating Authority had failed to consider the financial statements showing advances paid to Respondent No. 2, which indicated that no default had occurred.

5. Compliance with Statutory Requirements under Sections 8 and 9 of the IBC:
The Tribunal emphasized the statutory requirements under Sections 8 and 9, which mandate that the Operational Creditor must deliver a demand notice and that the Corporate Debtor must respond within ten days, indicating the existence of any dispute. The Tribunal found that the Corporate Debtor had complied with these requirements by raising a notice of dispute within the stipulated period, outlining various disputes related to the debt claimed by Respondent No. 2.

Conclusion:
The Tribunal concluded that the Adjudicating Authority had committed a serious error in admitting the Section 9 application, as the debt and default were mired in pre-existing disputes. The Tribunal set aside the impugned order, released the Corporate Debtor from CIRP, and directed that the Resolution Professional be paid his fees/expenses by the Appellant. The Tribunal allowed the appeal and provided that Respondent No. 2 could seek alternative legal remedies in an appropriate forum.

---