2025 (8) TMI 575 - AT - IBC

NCLAT Upholds Dismissal of Section 9 Application Due to Genuine Dispute Over Defective Batteries and Indemnity Bond

The NCLAT upheld the dismissal of the Section 9 application, finding a genuine pre-existing dispute between the parties regarding defective batteries and ... Dismissal of section 9 application - initiation of CIRP - legally enforceable operational debt due and payable or not - pre-existing dispute between the Appellant and the Respondent or not - HELD THAT:- It is a well settled legal proposition that for a pre-existing dispute to be a ground to nullify an application under Section 9, the dispute raised must be truly existing at the time of filing a reply to notice of demand as contemplated by Section 8(2) of IBC or even at the time of filing the Section 9 application. Whether in the instant factual matrix the disputes raised by the Corporate Debtor can qualify to be treated as pre-existing dispute which can constitute the basis for rejection of Section 9 application? - HELD THAT:- The Appellant in their Rejoinder Reply to the Section 9 application admitted that while they had received this message of defective batteries from the Corporate Debtor, they had replaced all defective batteries prior to sending of Demand Notice and that the complaints stood closed - Quite clearly, there is clear difference of standpoint between the Corporate Debtor and the Operational Creditor as to whether the complaint with respect to defective batteries was a continuing dispute as claimed by the Corporate Debtor or the same stood resolved with replacement of defective battery as claimed by the Appellant - by no stretch of imagination can the regular exchange of these WhatsApp chats on the quality of battery supplied and the replacement modalities of defective batteries can be treated as mere routine business communications lacking the flavour of pre-existing dispute. The Appellant would be liable for all repairs/replacement of the batteries for a warranty period of 39 months from the date of invoice including the batteries already sold. Nothing has been placed on record by the Appellant to establish that the indemnity bond was not signed by them. Nothing on record shows that any steps were taken by the Appellant to contemporaneously seek cancellation of the indemnity bond. However, in their Rejoinder Reply to the Section 9 application it has been belatedly contended that indemnity bond was signed under coercion and duress that further payments would not be released until the Appellant had signed the bond. When the signing of the indemnity bond by the Appellant as such is not disputed, for the Appellant to subsequently contend that this was signed under intimidation and not out of free-will is a matter that would clearly require deeper investigation and trial which is clearly beyond the scope of summary proceedings under IBC. Hence the Adjudicating Authority did not commit any error in holding the indemnity bond to be another ground of pre-existing dispute and factoring the same in rejecting the Section 9 application. The Adjudicating Authority therefore did not commit any error rejecting the Section 9 application after noticing the voluminous exchange of chat and email communications between the Corporate Debtor and Operational Creditor spread over a long period of time on the supply of defective goods, which clearly establishes that there were serious differences between them in the nature of real pre-existing disputes - For such disputed operational debt, Section 9 proceeding under IBC cannot be initiated at the instance of the Operational Creditor. The Adjudicating Authority has rightly dismissed the application of the Appellant filed under Section 9 of IBC. The impugned order does not warrant any interference - appeal dismissed. 1. ISSUES PRESENTED and CONSIDERED1.1 Whether an operational debt was due and payable such that a Section 9 petition under the Insolvency and Bankruptcy Code could be admitted.1.2 Whether a pre-existing dispute existed between the parties in relation to the claimed operational debt so as to bar initiation of CIRP under Section 9, applying the established test for pre-existing disputes.1.3 Whether contemporaneous communications and commercial conduct (including WhatsApp chats, purchase orders, warranty communications and an indemnity bond) constitute sufficient evidence of a genuine pre-existing dispute requiring rejection of a Section 9 application.1.4 Whether the Adjudicating Authority erred in treating certain documents (communications, warranty draft, indemnity bond) as grounds for rejecting the Section 9 petition.2. ISSUE-WISE DETAILED ANALYSISIssue 1 - Whether an operational debt was due and payable- Relevant legal framework and precedents: Admission of a Section 9 petition requires existence of debt and default; Section 8(2) notice/reply and Section 9 enquiry focus on whether debt has crystallised.- Court's interpretation and reasoning: The Tribunal framed the short point as whether an operational debt was due and payable and whether any pre-existing dispute existed in terms of the test laid down by the leading authority on pre-existing disputes. The Tribunal emphasized that crystallisation of claim is sine qua non for Section 9 admission.- Key evidence and findings: Communications showed repeated complaints about defective batteries, acknowledgements, assurances to replace, and contemporaneous messages admitting large quantum of defective batteries. The Corporate Debtor expressly denied crystallisation of the claim in its reply to the demand notice and maintained that replacement liabilities and other obligations remained outstanding.- Application of law to facts: Given ongoing complaints, admissions of defects, unresolved replacement obligations and denial of indebtedness in the respondent's reply, the Tribunal found that the claimed operational debt had not crystallised at the relevant time.- Treatment of competing arguments: The Operational Creditor argued invoices, delivery confirmations and ledger entries established a legally enforceable debt and pointed to an email seeking current invoices as an admission; the Corporate Debtor pointed to repeated defect communications, warranty/indemnity obligations and denial of debt. The Tribunal treated the email seeking invoices as not amounting to unconditional admission where other communications and denials showed unresolved obligations.- Conclusion: The Tribunal concluded that the debt had not crystallised and thus the requirement for admission under Section 9 was not satisfied in light of pre-existing, unresolved issues impacting liability.Issue 2 - Whether there existed a genuine pre-existing dispute that warrants rejection of Section 9 (application of the Mobilox test)- Relevant legal framework and precedents: The Tribunal applied the established test that a pre-existing dispute must be 'truly existing in fact' and not 'spurious, hypothetical or illusory,' and that the Adjudicating Authority must determine whether a plausible contention requiring further investigation exists rather than conduct a full merits trial.- Court's interpretation and reasoning: The Tribunal held that the enquiry is limited to whether a dispute exists that warrants adjudication by an appropriate forum and is not a patently feeble argument. The Tribunal examined contemporaneous communications, warranty terms and indemnity bond to see if disputes were articulated prior to demand notice.- Key evidence and findings: The record contained extensive WhatsApp exchanges from May 2022 onwards documenting complaints about batteries (burning, short-circuiting, fire-related cases), acknowledgements/apologies by supplier representatives, promises to replace, subsequent complaints that replacements were also defective, an indemnity bond accepting liability for repairs/replacement and warranty communications predating the demand notice. Also noted was the Corporate Debtor's reply to the demand notice explicitly denying crystallisation of claim and asserting replacement and other sums due from the Operational Creditor.- Application of law to facts: Applying the test, the Tribunal found these communications and documents collectively constituted a plausible and genuine dispute requiring investigation; they were not mere routine correspondence or patently feeble defences. The indemnity bond and warranty proposal, being contemporaneous and uncontroverted as executed, strengthened the conclusion of a pre-existing dispute.- Treatment of competing arguments: The Operational Creditor characterized the disputes as moonshine, contending the purchase of fresh orders (including a high-value order) showed absence of dispute and relied on an email dated 16.08.2022 as admission. The Tribunal rejected that characterization, finding the commercial conduct (including fresh orders) did not negate contemporaneous complaints and that the 16.08.2022 communication could not be read as an unqualified admission where other messages and the reply to the demand notice evidenced denial and unresolved liabilities. The Operational Creditor's argument that warranty was unsigned and indemnity bond signed under coercion were noted but the Tribunal held those contentions raised issues needing deeper investigation beyond summary IBC proceedings.- Conclusion: The Tribunal concluded there was a genuine pre-existing dispute prior to the demand notice and at the time of the Section 9 filing; therefore the Section 9 application was liable to be rejected under the applicable test for pre-existing disputes.Issue 3 - Whether WhatsApp communications, warranty proposal/draft and indemnity bond can be treated as evidentiary basis for pre-existing dispute- Relevant legal framework and precedents: Adjudicating Authority may rely on documentary record and contemporaneous communications to determine whether a plausible dispute exists; Section 9 proceedings do not require full trial of contractual disputes.- Court's interpretation and reasoning: The Tribunal held that contemporaneous chat messages, emails and signed documents that manifest disagreement, admissions of defects, refusal to accept replacement as adequate and an indemnity undertaking are legitimate materials to determine existence of a dispute for purposes of Section 9.- Key evidence and findings: WhatsApp messages recorded repeated defect complaints and supplier acknowledgements; warranty proposal asserted warranty terms and was relied upon by purchaser to place orders; indemnity bond (signed and stamped) set out express obligations to remedy or buy back defective batteries within a specified period and to indemnify against fire-related losses.- Application of law to facts: The Tribunal held these materials were not routine 'after-sales' notes but went to the root of the contractual performance and liabilities, and therefore constituted evidence of a genuine pre-existing dispute that could not be resolved in a Section 9 summary process.- Treatment of competing arguments: Supplier's contention that warranty was only a draft and indemnity bond signed under duress were noted; Tribunal observed such defenses implicate factual disputes requiring fuller adjudication and are inappropriate to displace the prima facie effect of the contemporaneous records in summary IBC proceedings.- Conclusion: The Tribunal treated WhatsApp communications, warranty correspondence and the indemnity bond as sufficient to establish a pre-existing dispute for purposes of rejecting the Section 9 application.Issue 4 - Whether the Adjudicating Authority erred in rejecting the Section 9 petition- Relevant legal framework and precedents: Standard of appellate interference on factual/contemporaneous record and application of the Mobilox test without conducting final merits adjudication in Section 9 proceedings.- Court's interpretation and reasoning: The Tribunal reviewed the impugned order's findings, the record of communications and documents and concluded the Adjudicating Authority properly applied the relevant test and did not err in holding the defence not patently feeble.- Key evidence and findings: The impugned order noted substantial quality issues communicated from May 2022, assurances of rectification and replacement, and execution of indemnity bond; the Tribunal found these findings supported by the record and not amenable to reversal on appeal.- Treatment of competing arguments: The Tribunal considered arguments that the adjudicating authority misread routine correspondence or overlooked admissions, but found reliance on contemporaneous record and the denial in the reply to demand notice justified the rejection. Allegations of later coercion or that documents were drafts raised questions for trial and not fit for summary disposition under IBC.- Conclusion: The Tribunal upheld the Adjudicating Authority's rejection of the Section 9 petition as justified on the record and consistent with the applicable legal test.3. SIGNIFICANT HOLDINGS- Verbatim crucial legal reasoning preserved:'It is clear, therefore, that once the operational creditor has filed an application, which is otherwise complete, the adjudicating authority must reject the application under Section 9(5)(2)(d) if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility. It is clear that such notice must bring to the notice of the operational creditor the 'existence' of a dispute or the fact that a suit or arbitration proceeding relating to a dispute is pending between the parties. Therefore, all that the adjudicating authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the 'dispute' is not a patently feeble legal argument or an assertion of fact unsupported by evidence. 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 or reaffirmed:• A pre-existing dispute must be 'truly existing in fact' and not a spurious, hypothetical or illusory defence; the adjudicating authority's role is to determine whether a plausible contention requiring further investigation exists rather than adjudicate merits.• Contemporaneous communications (including informal messages), warranty terms and executed indemnity instruments can constitute sufficient evidence of a pre-existing dispute in Section 9 proceedings.• Denial of debt and assertions that replacement obligations or other liabilities remain outstanding can prevent crystallisation of the claimed operational debt for the purpose of initiating CIRP under Section 9.- Final determinations on each issue:• The claimed operational debt was not shown to be crystallised at the relevant time in view of contemporaneous disputes and denials.• There existed a genuine pre-existing dispute prior to the demand notice and at the time of filing the Section 9 application; the dispute warranted further adjudication and was not patently feeble.• WhatsApp communications, warranty correspondence and the indemnity bond collectively constituted sufficient evidence of the pre-existing dispute.• The Adjudicating Authority did not err in rejecting the Section 9 petition; the appellate forum declined to interfere with the impugned order.