NCLAT sets aside Section 9 IBC application due to pre-existing dispute between operational creditor and corporate debtor

The NCLAT Principal Bench set aside a Section 9 IBC application filed by an operational creditor against a corporate debtor. The tribunal found a pre-existing dispute existed between the parties, making the Section 9 petition non-maintainable under Section 9(5)(ii)(d) as per Mobilox Innovations precedent. Despite complex transactions involving multiple entities and promoters, the court determined disputes between promoters were intermingled with corporate transactions, creating actual disputes requiring adjudication rather than summary insolvency proceedings. The appeal was allowed and Section 9 proceedings dismissed.

---

---

1. ISSUES PRESENTED and CONSIDERED

The judgment revolves around the following core legal questions:

• Whether there is a pre-existing dispute between the parties that would bar the admission of the Section 9 application under the Insolvency and Bankruptcy Code, 2016 (IBC).
• Whether the transactions between the parties constitute a 'running account' and the implications of this on the limitation period under the Limitation Act, 1963.
• Whether the demand is barred by the Limitation Act, 1963.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Pre-existing Dispute

• Relevant Legal Framework and Precedents: Under Section 9 of the IBC, a pre-existing dispute between the operational creditor and the corporate debtor can bar the admission of an insolvency application. The Supreme Court's decision in Mobilox Innovations Private Limited Vs. Kirusa Software Private Limited is pivotal, which mandates that if a dispute exists, the application must be rejected.
• Court's Interpretation and Reasoning: The court examined the nature of the disputes, which were primarily between the promoters of the corporate debtor and the operational creditor. It concluded that these disputes were intertwined with the corporate entities, thus constituting a pre-existing dispute under Section 9.
• Key Evidence and Findings: Evidence included transcripts of conversations indicating disputes over rent and adjustments of payments, and proceedings from the Delhi High Court, which highlighted ongoing litigations between the promoters.
• Application of Law to Facts: The court applied the precedent set by the Supreme Court, determining that the disputes were not merely between individuals but involved the corporate entities, thus falling within the scope of a pre-existing dispute under the IBC.
• Treatment of Competing Arguments: The operational creditor argued that disputes between promoters should not affect the corporate entities. However, the court pierced the corporate veil, recognizing the disputes as relevant to the insolvency proceedings.
• Conclusions: The court concluded that the existence of a pre-existing dispute barred the Section 9 application.

Issue 2: Running Account and Limitation

• Relevant Legal Framework and Precedents: A running account involves continuous transactions and can affect the limitation period under Section 19 of the Limitation Act, which allows for a fresh limitation period from the date of the last payment.
• Court's Interpretation and Reasoning: The court scrutinized the nature of transactions and payments between the parties, noting that the complexity of transactions extended beyond simple supply of goods.
• Key Evidence and Findings: The court examined bank statements and transaction records, which showed multiple business dealings, including rent payments and other financial exchanges.
• Application of Law to Facts: The court found that the transactions did not constitute a simple running account for goods and services due to the involvement of rent and other unrelated payments.
• Treatment of Competing Arguments: The operational creditor's assertion that the transactions were a running account was challenged by evidence of mixed transactions, leading the court to reject the notion of a straightforward running account.
• Conclusions: The court concluded that the transactions were too complex to be deemed a running account solely for the supply of goods, affecting the limitation period analysis.

Issue 3: Limitation

• Relevant Legal Framework and Precedents: The Limitation Act, 1963, particularly Section 19, governs the extension of limitation periods based on part-payments.
• Court's Interpretation and Reasoning: The court considered whether the part-payments made extended the limitation period, ultimately finding that the complexity of transactions precluded a straightforward application of Section 19.
• Key Evidence and Findings: The last part-payment was made on 02.03.2022, which the adjudicating authority initially found to extend the limitation period.
• Application of Law to Facts: The court determined that the nature of payments and transactions did not clearly extend the limitation period due to the intertwined disputes and mixed nature of transactions.
• Treatment of Competing Arguments: The operational creditor's reliance on part-payments to extend the limitation was countered by the corporate debtor's evidence of disputes and non-payment of some debts.
• Conclusions: The court found that the limitation period was not straightforwardly extended due to the nature of the transactions and disputes.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: "It is important to separate the grain from the chaff and to reject a spurious defence which is mere bluster. However, in doing so, the Court does not need to be satisfied that the defence is likely to succeed. The Court does not at this stage examine the merits of the dispute except to the extent indicated above. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application."
• Core Principles Established: The court reinforced the principle that pre-existing disputes between corporate entities, even if involving their promoters, can bar insolvency proceedings under Section 9 of the IBC.
• Final Determinations on Each Issue: The court determined that there was a pre-existing dispute, the transactions did not constitute a simple running account, and the limitation period was not clearly extended, leading to the dismissal of the Section 9 application.

Order: The appeal was allowed, and the Section 9 proceedings against the corporate debtor were set aside, with no orders as to costs.

---