Operational creditor's Section 9 application upheld after corporate debtor admits Rs 1.76 crore debt through correspondence

The NCLAT Principal Bench upheld the Adjudicating Authority's decision to admit a Section 9 application filed by an operational creditor for initiating CIRP. The corporate debtor had clearly admitted operational debt of Rs 1.76 crores through correspondence dated 22.04.2015 and 07.03.2016, acknowledging financial challenges and need to clear dues. The corporate debtor's claims of pre-existing disputes regarding alleged misappropriation were rejected as a "moonshine defence" lacking credible evidence, with inconsistent ledger entries failing to corroborate their position. The NCLAT found all conditions under Section 9 IBC satisfied and dismissed the appeal.

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Issues Involved:
1. Whether the Adjudicating Authority failed to consider pre-existing disputes between the Corporate Debtor and the Operational Creditor while admitting the Section 9 application under the Insolvency and Bankruptcy Code, 2016.
2. Whether the operational debt was due and payable by the Corporate Debtor and if any default was committed.
3. Whether the alleged pre-existing disputes were genuine and substantial enough to dismiss the Section 9 application.

Detailed Analysis:

1. Pre-existing Disputes:
The primary issue raised by the Appellant was that the Adjudicating Authority did not take into account the pre-existing disputes between the Corporate Debtor and the Operational Creditor. The Appellant argued that the Operational Creditor acted in contravention of the Service Agreement by denying access to warehouses and illegally withholding assets, which led to financial losses for the Corporate Debtor. The Appellant contended that these actions constituted pre-existing disputes, which should have been considered before admitting the Section 9 application. The Corporate Debtor had also notified the Operational Creditor about these disputes in a Notice of Dispute dated 07.03.2020, which was acknowledged by the Operational Creditor. However, the Adjudicating Authority found that the Corporate Debtor's claims of pre-existing disputes were not substantiated by credible evidence and appeared to be a strategy to avoid payment of the legitimate dues owed to the Operational Creditor.

2. Operational Debt and Default:
The Tribunal examined whether the operational debt exceeded the prescribed threshold and was due and payable. The Operational Creditor presented evidence, including a letter dated 22.04.2015 and an email dated 07.03.2016, where the Corporate Debtor acknowledged the debt and requested more time for payment due to financial difficulties. The Adjudicating Authority found these correspondences to be clear admissions of liability by the Corporate Debtor. The Corporate Debtor had made partial payments, further indicating acknowledgment of the debt. The Tribunal concluded that the Corporate Debtor had admitted the outstanding debt and default, which was a valid admission in the eyes of the law.

3. Examination of Alleged Pre-existing Disputes:
The Tribunal assessed whether the alleged disputes were genuine. The Corporate Debtor claimed that the Operational Creditor had misappropriated goods and illegally sold stocks without consent. However, the Tribunal noted discrepancies in the Corporate Debtor's financial records and ledger entries, which appeared manipulated. The Adjudicating Authority had sought explanations for these discrepancies, but the Corporate Debtor's responses failed to inspire confidence. The Tribunal found that the Corporate Debtor had not provided plausible evidence to corroborate the alleged pre-existing disputes. The Tribunal was persuaded that the claims of disputes were a moonshine defense, lacking genuine substance.

Conclusion:
The Tribunal upheld the Adjudicating Authority's decision to admit the Section 9 application, finding no error in the conclusion that the Corporate Debtor owed an operational debt exceeding the threshold limit and that the alleged pre-existing disputes were not genuine. The Tribunal dismissed the appeal, allowing the Corporate Insolvency Resolution Process (CIRP) to proceed against the Corporate Debtor in accordance with the law.

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