2025 (9) TMI 548 - AT - IBC

Appeal dismissed under Section 9 IBC: pre-existing dispute and conditional final bill defeat claim of debt and default

NCLAT dismissed the appeal challenging the Adjudicating Authority's rejection of an application to initiate CIRP under Section 9 of the IBC, finding a ... Dismissal of application for initiating a CIRP under Sec 9 of IBC - existence of a pre-existing dispute between the parties - HELD THAT:- When the entire case of the appellant is spun around the final bill dated 11.04.2022, it is not adequately explained how it hits the threshold limit for invoking the IBC. Clause 15 of the Construction Contract stipulates that the payment of the final bill would be done but after due certification of the completion of the work. To sum up, the final bill is not unqualified. This apart, the respondent himself has admitted to some discrepancies in the bill. Given the setting, there is a doubt if the time for payment of the alleged debt has arrived. In other words, both the debt and the default in paying the same which are sine qua non for invoking Sec.9 are in doubt. Whether the respondent will be entitled to claim damages at Rs. 25,000/- per day might have to be tested in a separate proceeding, but nothing prevents the respondent from making the claim based on this term. And, the respondent had raised this point in its defence, and if this is telescoped into the case of the appellant, it leaves the appellant’s claim shaky. It is very apparent that the case of the appellant is not free of factors which the IBC regime does not accommodate. Consequently, this tribunal does not find any material to interfere with the Order of the Adjudicating Authority - Appeal dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether an operational creditor's petition under Section 9 of the IBC is maintainable where the debtor has, prior to the issuance of the Section 8 notice or prior to the admission stage, raised a pre-existing dispute as to the existence, nature or correctness of the debt. 2. Whether a final bill that bears endorsements by the respondent which are not unconditional constitutes an admitted debt sufficient to satisfy the 'debt and default' requirement under Section 9 of the IBC. 3. Whether the quantum claimed in the demand notice satisfies the statutory threshold when the documented final bill reflects a lower net amount and the demand notice aggregates additional items without adequate explanation. 4. Whether allegations of delay, quality defects and a contractual liquidated damages/penalty claim raised by the respondent constitute a pre-existing dispute that bars initiation of CIRP under Section 9. 5. Whether summary/adjudicative treatment at the Section 9 stage is appropriate to resolve contested issues of fact and mixed questions of liability, quantification and contractual entitlement to damages. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Pre-existing dispute and maintainability of Section 9 petition Legal framework: Section 9 IBC requires existence of a debt and default; adjudicating authority must dismiss a Section 9 petition if there is a pre-existing dispute between the parties in relation to the claim. The IBC is not a recovery mechanism to bypass dispute resolution clauses where a genuine dispute exists. Precedent Treatment: The Tribunal considered earlier ratios relied upon by parties. The appellant invoked a precedent holding that verification/acknowledgement of a bill may constitute an admitted debt; the respondent relied on authority establishing that pre-existing disputes (including quality, delay, termination) can defeat a Section 9 petition. Both lines were considered; the Court applied the latter principle in the facts. Interpretation and reasoning: The Court analysed contemporaneous communications and contractual endorsements. It found express and specific communications from the respondent raising issues (quality complaints and expressed non-acceptance), together with contract provisions permitting deduction/penalty for delay. The presence of such complaints and endorsements prior to or contemporaneous with the demand notice, and the absence of an unconditional acceptance of the final bill, demonstrated a pre-existing dispute as to liability and/or quantum. Ratio vs. Obiter: Ratio - A Section 9 petition is liable to be dismissed where evidence on record shows a bona fide pre-existing dispute on existence, correctness or quantification of the debt that cannot be resolved in a summary proceeding. Obiter - Observations on alternative dispute-resolution routes under the contract. Conclusion: The existence of contemporaneous communications and qualified endorsements established a pre-existing dispute sufficient to dismiss the Section 9 petition. Issue 2 - Effect of endorsements on final bill: admitted debt or contested claim? Legal framework: An admitted debt requires unconditional acceptance/acknowledgement by the debtor. Endorsements, qualifications, or explicit statements of non-acceptance on bills may negate an admission and indicate a dispute. Precedent Treatment: The Court referenced tribunal precedent relied on by the appellant that an acknowledged/verified final bill may amount to an admitted debt; however, the Court examined the documentary endorsement language rather than treating verification as conclusive. Interpretation and reasoning: The final bill bore two endorsements, one beginning with 'Not accepting...', and other endorsements referring to security deposit and discrepancies. The Court held that the language was not plainly limited to a discrete item (security deposit) and that, taken together, the endorsements did not amount to an unconditional acceptance of liability. The existence of such endorsements created factual issues requiring further evidence and could not be resolved summarily at the Section 9 stage. Ratio vs. Obiter: Ratio - Qualified endorsements on a bill preclude treating the bill as an unqualified admission sufficient to invoke Section 9 without further enquiry. Obiter - Remarks on the appellant's contention that an endorsement referring to security deposit alone would not negate admission (rejected on the facts). Conclusion: The final bill was not an unqualified admission of debt; endorsements and contemporaneous emails showed qualification and dispute, undermining a summary finding of admitted debt. Issue 3 - Quantum and statutory threshold for invoking IBC Legal framework: Statutory threshold for initiating CIRP under the relevant IBC provision must be satisfied by the claimed debt as recorded in the demand notice; the threshold cannot be presumed if the documentary record reflects a materially lower sum and the higher quantum in the demand lacks explanation. Precedent Treatment: The Court applied established principles that the exact debt must be demonstrable and that material discrepancies in claimed amounts raise questions about the correctness of the demand. Interpretation and reasoning: The admitted net amount in the final bill was Rs. 81,76,767, whereas the statutory demand alleged Rs. 1,02,87,004 and further asserted an additional Rs. 17 lakhs for glass/aluminium. The appellant failed to explain how the final bill enlarged to the higher demand figure and did not satisfactorily establish that the debt exceeded the threshold. Given that the final bill was the core of appellant's case, unexplained discrepancies on quantum undermined maintainability. Ratio vs. Obiter: Ratio - Where the documented bill amount is materially lower than the demand notice and no adequate justification is shown, the threshold requirement for invoking IBC is not met on the record before the Adjudicating Authority. Obiter - Comments on the possibility of establishing additional items in separate proceedings. Conclusion: The appellant did not establish that the debt met the statutory threshold; unexplained enlargement of the claim militated against admission of the Section 9 petition. Issue 4 - Contractual claim for delay/penalty and its effect on dispute status Legal framework: Contractual clauses permitting liquidated damages or day-rate penalties are substantive elements of defence/offset that can give rise to genuine disputes as to net liability; such claims may be tested in separate proceedings and can negate insolvency relief if bona fide. Precedent Treatment: The Court relied on the settled view that IBC does not supplant contractual remedies and that genuine disputes about contractual damages may preclude CIRP initiation. Interpretation and reasoning: The construction contract contained a clause imposing Rs. 25,000 per day for delay. There was uncontested evidence that work was not completed within time despite extensions and that termination occurred. The respondent asserted entitlement to damages under the contract. The Court observed that such a substantive defence/offset could materially affect the debt/default matrix and cannot be conclusively resolved in a summary Section 9 adjudication. Ratio vs. Obiter: Ratio - A bona fide contractual claim for damages/penalty that affects net liability constitutes a relevant pre-existing dispute and bars Section 9 relief where resolution requires factual inquiry beyond summary determination. Obiter - Remarks that entitlement to such damages may be tested in separate proceedings. Conclusion: The contractual penalty/damages claim contributed to a genuine dispute over quantum and liability, supporting dismissal of the Section 9 petition. Issue 5 - Appropriateness of summary adjudication at Section 9 stage Legal framework: The Section 9 stage permits prima facie evaluation but is not a forum for trial on disputed issues of fact or complex quantification; where material disputes exist, the petition must be dismissed to avoid misuse of insolvency proceedings. Precedent Treatment: The Court applied established standards limiting Section 9 proceedings to threshold/summary enquiries and refusing to decide contested factual matters requiring fuller evidence. Interpretation and reasoning: Multiple factual disputes (qualified endorsements, contemporaneous quality complaints, timeline of discrepancies, unexplained quantum differences, and contractual penalties) existed. The Court held these issues could not be resolved in a summary proceeding and therefore Section 9 was not the appropriate remedy to determine these contested elements. Ratio vs. Obiter: Ratio - Where the existence of genuine disputes of fact and mixed questions of law (liability, quantification, contractual offsets) appear on the record, the Section 9 petition must be dismissed rather than resolved summarily. Obiter - Guidance that aggrieved parties may pursue alternative fora (e.g., arbitration or civil suit) to adjudicate these disputes. Conclusion: Summary adjudication at the Section 9 stage was inappropriate given the contested factual and contractual issues; dismissal of the petition was warranted. Final Disposition (Court's Conclusion) The appeal is dismissed. The record discloses contemporaneous qualified endorsements and communications, unexplained discrepancies in quantum between the final bill and the demand notice, and substantive contractual claims for delay that together constitute a pre-existing dispute; hence the Section 9 petition was correctly dismissed by the Adjudicating Authority.