2025 (9) TMI 761 - AT - IBC

Appeal allows Section 9 IBC petition; Form 3 demand with invoices satisfies Rule 5, no genuine pre-existing dispute

NCLAT allowed the appeal, set aside the impugned order that had dismissed the Section 9 IBC petition. The Bench held the demand notice in Form 3 with ... Dismissal of petition filed by the Appellant u/s 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) against CD for the resolution of its debt - demand notice issued by the OC in Form – 3 is valid or not - existence of pre-existing dispute between the parties or not. Validity of demand notice issued by the OC in Form – 3 - HELD THAT:- Since, the amount was not paid, therefore, the Appellant decided to pursue the remedy under the Code and served notice in form 3 prescribed in Rules. Both forms are provided in Rule 5 of the Rules. Rule 5(1)(a) prescribes a demand notice in form 3 and Rule 5(1)(b), a copy of the invoice attached in form 4. Form 3 and 4 are printed performa of the notice. Form 3 is the form of demand notice / invoice demanding payment under the insolvency and bankruptcy code, 2016 whereas Form 4 is the form of notice with which invoice demanding payment is to be attached. Form 3 may be sent as a demand notice or invoice demanding payment whereas Form 4 notice with which invoice demanding payment is to be attached. There is no dispute that the Appellant has sent notice with invoices. The demand notice with invoices fulfils the requirements to prove the existence of operational debt and the amount of default. If the notice sent in form 3, OC has to give particulars of unpaid operational debt whereas in the notice sent on form 4, the OC has to only attach the invoices on which its claim is based without giving any further particulars - The very fact that the notice contained the invoices and that the invoices have not been challenged by the Respondent on the ground that the same are fake and fabricated, it would be totally hyper technical plea to reject the application of the Appellant on the ground that the notice issued under Section 8 in form 3 with invoices was a defective notice. Existing of pre-existing dispute or not - HELD THAT:- In so far as the dispute raised by the Respondent about the seizure of the vessels is concerned, the said action has been taken by the customs authorities on 25.11.2020 much after the inauguration of the restaurant in the vessels and no dispute was ever raised earlier as there is no evidence brought on record by the Respondent by way of any notice, suit or arbitration etc. with the Appellant in respect of seizure - Beside this, the Tribunal has not really appreciated that Sunrich was appointed by the Respondent as its clearing and forwarding agent for documentation at customs/port for import of the vessels in question for which the said company was responsible and that the appeal against the order of confirming the demand raised by the customs department is still pending and the liability of the Appellant has not been crystalized. The order passed by the Tribunal is patently erroneous and hence, the appeal is allowed and the impugned order is set aside. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether a demand notice issued under the Rules in Form 3 that also appends invoices satisfies the statutory requirements for initiating a Section 9 application, or whether such a notice must be in Form 4 when the claim is based on invoices. 2. Whether communications and events relied upon by the Corporate Debtor constitute a pre-existing dispute sufficient to defeat a Section 9 petition - specifically (a) two contemporaneous emails alleging delay/deficiency in performance and (b) subsequent seizure of the vessels by Customs authorities. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of demand notice: Form 3 with appended invoices vs. requirement of Form 4 Legal framework: Rule 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules prescribes Form 3 (demand notice/invoice demanding payment) and Form 4 (notice with which invoice demanding payment is to be attached). Section 8 and Section 9 of the Code govern issuance of demand notice and initiation of Corporate Insolvency Resolution Process by an Operational Creditor. Precedent treatment: The Tribunal relied on a prior authority that treated the absence of invoices with a Form 3 notice as fatal, holding that a claim based on invoices requires Form 4. The appellate Court considered that precedent but evaluated the facts of the present notice (Form 3 plus appended invoices). Interpretation and reasoning: Both Form 3 and Form 4 are printed proformas with overlapping purposes: Form 3 may be used as a demand notice or invoice demanding payment and requires particulars of unpaid operational debt; Form 4 serves as a notice to which invoices are attached and does not require further particulars. Where a Form 3 notice in fact contains the invoices and particulars establishing the operational debt and amount of default, rejection on purely technical grounds would be hyper-technical. The Court emphasized substance over form - the objective statutory purpose of informing the debtor of the claim and amount in default was satisfied because invoices were furnished and not disputed as fabricated. Ratio vs. Obiter: Ratio - a demand notice in Form 3 that appends invoices and gives required particulars satisfies Rule 5 and Section 8/9 requirements; rejection solely for not using Form 4 where invoices are attached is impermissibly technical. Obiter - general remarks on the normative differences between Form 3 and Form 4 beyond the facts of the case. Conclusion: The demand notice served in Form 3 with attached invoices fulfilled the statutory requirements and could not be invalidated on the ground that Form 4 should have been used; the Tribunal's dismissal on this ground was erroneous. Issue 2 - Existence of a pre-existing dispute: adequacy of two emails alleging delay/deficiency Legal framework: The Code bars admission of a Section 9 application where a pre-existing dispute regarding the operational debt exists and is demonstrable on record prior to receipt of the demand notice. The test requires that the dispute be substantive and existing before the notice; mere grievances or later-arising contentions do not suffice. Precedent treatment: The Tribunal relied on two emails dated September/October 2018 to find a pre-existing dispute. The appellate Court considered established authorities requiring a real, pre-existing dispute and that disputes raised after receipt of demand notice or not crystallised formally are insufficient. The Court noted precedents holding that post-notice litigation cannot be treated as pre-existing. Interpretation and reasoning: The two emails relied upon were communications regarding plumbing/works and indicated that certain works were behind schedule. The Court examined the factual matrix: the vessels were inaugurated after those emails and were operational hosting events up to March 2020; contemporaneous correspondence showed that works had progressed and that any delay was attributable to the Corporate Debtor's allocation of work. The Court concluded the emails reflected interlocutory operational grievances rather than a clear, subsisting contractual dispute that would negate the debt. The absence of prior formal steps (notice, suit, arbitration) asserting repudiation or denial of liability weighed against treating the emails as a pre-existing dispute. Ratio vs. Obiter: Ratio - isolated emails flagging performance issues, followed by continued acceptance of services and payments and later operation of the vessels, do not constitute a pre-existing dispute sufficient to defeat a Section 9 claim. Obiter - observations on how allocation of responsibility for delays may inform credibility of dispute-based defenses. Conclusion: The two emails relied upon did not constitute a pre-existing dispute that precluded the Section 9 petition; the Tribunal's reliance on them was misplaced. Issue 3 - Effect of Customs seizure and pending customs proceedings on existence/crystallization of liability Legal framework: A pre-existing dispute must relate to the operational debt between the parties and must have been extant before the demand notice. Parallel disputes between the Corporate Debtor and a third party (e.g., Customs authority) do not automatically create a dispute inter se between the Operational Creditor and Corporate Debtor unless the Operational Creditor's liability is directly and specifically questioned. Precedent treatment: The Tribunal considered the customs seizure as indicative of a substantive dispute. The appellate Court analyzed whether the customs action and demand crystallized any liability of the Operational Creditor or was a separate controversy between the Corporate Debtor and Customs authorities. Interpretation and reasoning: The customs seizure occurred substantially after the events cited as performance issues and after the vessels had been inaugurated and operated. The Corporate Debtor had itself appointed a clearing/forwarding agent for customs documentation, and the Operational Creditor's role in customs clearance was contested. Further, the customs demand had an appeal pending, so no final crystallization of liability against the Operational Creditor had occurred. The Court found no evidence of any prior notice, suit, or arbitration by the Corporate Debtor against the Operational Creditor contesting liability on account of customs classification or seizure prior to the demand notice. Ratio vs. Obiter: Ratio - a later action by customs against the Corporate Debtor (and pending appeal) does not automatically amount to a pre-existing dispute between Operational Creditor and Corporate Debtor sufficient to defeat a Section 9 application where no prior contestation of the Operational Creditor's invoices was demonstrated. Obiter - remarks on the significance of agency/appointment of customs agents and the need for parties to bring specific inter se disputes on record. Conclusion: The customs seizure and subsequent proceedings did not establish a pre-existing dispute between the parties that would invalidate the Section 9 petition; the Tribunal's reliance on the seizure to dismiss the petition was unsustainable. Overall disposition and costs Interpretation and reasoning: Considering (a) the demand notice in Form 3 contained invoices and particulars of unpaid operational debt and was not contested as fabricated, (b) the alleged pre-existing dispute relied on isolated emails was not substantiated by contemporaneous repudiation or formal proceedings, and (c) the customs action did not crystallize liability as between the parties prior to the demand notice, the Tribunal's dismissal on the two grounds was patently erroneous. Conclusion: The Tribunal's order dismissing the Section 9 application was set aside; the appeal was allowed. Parties to bear their own costs; any pending interlocutory applications closed.