Corporate debtor's appeal dismissed as unsubstantiated GST raid claims fail to establish pre-existing dispute for operational debt under Section 9 IBC

NCLAT dismissed the appeal challenging initiation of Corporate Insolvency Resolution Process (CIRP) under Section 9 of IBC. The corporate debtor failed to establish a pre-existing dispute regarding operational debt exceeding Rs. 1 lakh owed to the operational creditor for goods received. Claims of dispute due to GST raids and alleged fake invoices were unsubstantiated as GST proceedings did not constitute genuine pre-existing dispute between parties concerning the operational debt. Arguments regarding company solvency and preference for civil proceedings were deemed irrelevant for CIRP initiation. The adjudicating authority correctly admitted the operational creditor's application.

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Issues Involved:

1. Pre-existing dispute regarding GST payments and invoices.
2. Solvency of the Corporate Debtor.
3. Jurisdiction and scope of the Adjudicating Authority under Section 9 of the Code.
4. Validity of the demand notice and the initiation of CIRP.

Detailed Analysis:

1. Pre-existing Dispute Regarding GST Payments and Invoices:

The Appellant/Corporate Debtor argued that there was a pre-existing dispute concerning the payment of GST on the invoices issued by Respondent No. 1. This dispute was substantiated by raids conducted by the Directorate General of GST Intelligence and a writ petition filed before the Punjab and Haryana High Court. The Appellant contended that the invoices were under investigation for being bogus, thus questioning their genuineness. The Appellant also claimed to have sent emails on 27th and 28th May 2019, raising issues about GST payments. However, these emails were not presented before the Adjudicating Authority.

The Respondent countered that there was no pre-existing dispute between the parties regarding the invoices before the demand notice was issued. The Adjudicating Authority noted that the GST-related issues were between the Corporate Debtor and the GST Department, and not with the Operational Creditor. The Tribunal found that the GST returns filed by the Operational Creditor were on record and there was no legal case initiated against the Operational Creditor by the GST authorities.

2. Solvency of the Corporate Debtor:

The Appellant/Corporate Debtor claimed that the company was solvent, with an annual turnover exceeding Rs. 300 crore and export sales over Rs. 50 crore. The Appellant argued that the CIRP should not be initiated against a solvent company. However, the Tribunal held that the solvency of the company was not relevant to the initiation of CIRP under the IBC if there was an undisputed debt and default.

3. Jurisdiction and Scope of the Adjudicating Authority Under Section 9 of the Code:

The Appellant contended that the Adjudicating Authority improperly delved into the merits of the dispute by assessing the quantum of the alleged debt. The Tribunal reiterated that the Adjudicating Authority's role at the admission stage of a Section 9 application is limited to determining whether there is an operational debt exceeding Rs. 1 lakh, whether the debt is due and payable, and whether there is a pre-existing dispute. The Tribunal found that the Adjudicating Authority had correctly applied the three-fold test laid down by the Supreme Court in Mobilox Innovations Private Ltd vs Kirusa Software Private Ltd.

4. Validity of the Demand Notice and the Initiation of CIRP:

The Appellant argued that the demand notice was issued without authority and that the disputes between the parties were civil in nature, requiring resolution through civil courts or arbitration. The Tribunal noted that the demand notice was validly issued under Section 8 of the Code and that the existence of a dispute must be genuine and pre-existing to bar the initiation of CIRP. The Tribunal found that the Appellant failed to demonstrate a genuine pre-existing dispute and that the operational debt remained unpaid.

Conclusion:

The Tribunal concluded that the Appellant/Corporate Debtor failed to demonstrate a pre-existing dispute as required under Section 9 of the IBC. The Adjudicating Authority rightly admitted the application filed by Respondent No. 1/Operational Creditor and initiated the CIRP against the Corporate Debtor. The appeal was dismissed, and the CIRP against the Corporate Debtor was ordered to continue as per the provisions of the IBC.

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