2025 (11) TMI 243 - AT - IBC

Appeal dismissed; Sec. 9 application rejected due to pre-existing plausible dispute over invoice validity and debt crystallization

NCLAT (PB) dismissed the appeal and upheld the Adjudicating Authority's rejection of the Sec. 9 application. The tribunal found a plausible pre-existing ... Dismissal of Section 9 application filed by the Appellant - operational debt claimed by the Operational Creditor was a crystallized amount or not - plausible dispute which had been raised by the Corporate Debtor which require further investigation or not - pre-existing dispute exists or not - HELD THAT:- The Adjudicating Authority has rightly adverted attention to the issue of validity and accuracy of the invoices which has led to a situation of non-crystallization of the claim amount leading to the spectre of disputed debt. The Hon’ble Supreme Court in its judgment in Mobilox Innovations Pvt. Ltd. Vs Kirusa Software Pvt. Ltd. [2017 (9) TMI 1270 - SUPREME COURT] has held that it is enough that a dispute exists. The Adjudicating Authority has to only look into the factual matrix as to whether there is a plausibility of dispute and that the defence of pre-existing dispute raised by the Corporate Debtor is not a feeble defence or unsupported by evidence without entering into adjudication of the dispute. On applying the test laid down in Mobilox judgement by the Hon’ble Apex Court to the facts of the present case it is clear that the defence raised by the Corporate Debtor in their reply filed in Section 9 application is not illusory or moonshine. The present is not a case where there is undisputed debt for which insolvency can be asked for initiation by the Appellant. The Adjudicating Authority has, therefore, correctly applied the ratio of the Mobilox judgment in dismissing the Section 9 application. It is well settled that in Section 9 proceedings the Adjudicating Authority is not to enter into final adjudication with regard to existence of dispute between the parties regarding operational debt. Section 9 proceedings cannot be converted into proceedings for adjudication of disputes between the parties. What has to be looked into is whether the defence raises a dispute which needs further adjudication by a competent court. Disputes pertaining to contractual issues are not to be resolved in Section 9 proceedings. Present is a case where pre-existing disputes between the parties is writ large. In the given facts and circumstances, this is not a case where the Adjudicating Authority could have admitted the Section 9 application. Hence, there was no error committed by the Adjudicating Authority in rejecting the Section 9 application. The Adjudicating Authority has not committed any error in dismissing the Section 9 application filed by the Appellant. There are no merit in the appeal - appeal dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Adjudicating Authority erred in dismissing an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 by treating the claimed operational debt as not crystallised. 2. Whether a pre-existing dispute existed between the parties such that the Section 9 petition was liable to be rejected without entering into final adjudication of the contractual claims. 3. Whether payments made by the Corporate Debtor during the relevant period and the manner of appropriation of those payments by the Operational Creditor created a plausible dispute as to the invoices and quantum of debt. 4. Whether claimed interest (24% p.a.) incorporated in invoices, without prior mutual consensus or past practice of payment of interest, constituted a disputed component affecting crystallisation of the operational debt. 5. Applicability of the Supreme Court test in Mobilox Innovations (i.e., only plausibility of dispute and not its merits) to determine admissibility under Section 9. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of dismissal under Section 9 for non-crystallised debt Legal framework: Section 9 of the IBC permits initiation of CIRP by an Operational Creditor where there is a default in payment of an operational debt; Section 8(2) requires the Corporate Debtor to communicate existence of a dispute on receipt of the demand notice. The Adjudicating Authority must reject under Section 9(5)(2)(d) where notice of dispute exists or a record of dispute is present. Precedent treatment: The Court applied the Mobilox test: the adjudicating authority must determine whether a plausible pre-existing dispute exists that is not a patently feeble or spurious defence; it must not finally adjudicate the merits. Interpretation and reasoning: The Tribunal examined the pleadings, payments, e-mails and claim computations to assess whether a plausible dispute existed. It found material contradictions about appropriation of admitted payments, discrepancies in invoice amounts, and communications seeking reconciliation which together rendered the claimed amount non-crystallised. The summary jurisdiction under Section 9 does not permit detailed resolution of such factual and accountancy disputes. Ratio vs. Obiter: Ratio - where material conflicting factual contentions about the quantum and constituents of alleged operational debt exist (including admitted payments and disputed appropriation), the Adjudicating Authority must treat the debt as disputed and may reject the Section 9 petition without entering into merits. Obiter - procedural observations on non-service of demand notice and later e-mails. Conclusion: The Adjudicating Authority did not err in dismissing the Section 9 petition on the ground that the debt was not crystallised and a plausible dispute existed. Issue 2 - Existence of pre-existing dispute and the standard of plausibility Legal framework: Pre-existing dispute must exist prior to receipt of demand notice or at time of filing reply under Section 8(2). The adjudicating authority must assess whether the defence is plausible and not merely a fac¸ade; it need not decide final merits. Precedent treatment: Mobilox adopted: existence of dispute judged on plausibility; spurious defences to be rejected; true disputes require further adjudication and bar Section 9 admission. Interpretation and reasoning: Although the Corporate Debtor did not reply to the demand notice (service contested), a detailed reply to the Section 9 petition raised categorical denial and factual grounds: admitted payments, requests for reconciliation, assertion of overcharging/fabricated invoices, lack of supporting delivery documents, and disagreement on interest. These pleaded matters demonstrated a plausible pre-existing dispute requiring investigation beyond the summary scope, thereby satisfying the Mobilox test. Ratio vs. Obiter: Ratio - materially conflicting factual contentions raised in a detailed reply can constitute a plausible pre-existing dispute barring admission under Section 9; Obiter - observations on timing of communications relative to demand notice. Conclusion: A pre-existing, plausible dispute existed which was not patently feeble, justifying rejection of the Section 9 application. Issue 3 - Appropriation of payments and running account consequences for crystallisation Legal framework: Principles of appropriation (Section 59 Indian Contract Act invoked by parties) and running account practice bear on which invoices payments discharge; disagreement on appropriation affects whether debt remains crystallised. Precedent treatment: The Tribunal treated the appropriation question as factual and beyond summary adjudication under Section 9 where rival contentions exist. Interpretation and reasoning: The Corporate Debtor produced contemporaneous communications and a schedule of payments (total Rs. 2.89 Cr.) asserting that payments were made towards the invoices claimed; the Operational Creditor asserted unilateral appropriation towards older invoices. The parties' conflicting accounts on appropriation and accounting practices produced a manifest dispute over which invoices were outstanding. Such a dispute requires evidentiary adjudication and cannot be resolved on a Section 9 summary application. Ratio vs. Obiter: Ratio - admitted payments coupled with conflicting appropriation claims constitute a plausible factual dispute preventing Section 9 admission; Obiter - references to specific emails and computations. Conclusion: The manner and effect of the payments created a viable pre-existing dispute as to crystallisation of debt; the Adjudicating Authority rightly treated it as requiring further adjudication. Issue 4 - Interest claimed in invoices without prior mutual acceptance Legal framework: A claim for interest in invoices must be supported by mutual agreement, conduct or prior enforcement to be treated as indisputable component of operational debt. Precedent treatment: The Tribunal applied ordinary contract principles and Mobilox's requirement of plausibility to hold that unilateral inclusion of interest can create a dispute if unsupported by agreement or past practice. Interpretation and reasoning: There was no evidence that interest had been paid historically or that parties had agreed to the 24% p.a. clause. Mere mention of interest in invoices, without mutual understanding or past enforcement, casts doubt on the inclusion of interest in the crystallised debt and creates a shadow of dispute. Ratio vs. Obiter: Ratio - unilaterally claimed interest, unsupported by agreement or course of dealing, can be a legitimate ground of dispute in Section 9 assessment; Obiter - detailed treatment of rate reasonableness. Conclusion: The interest component was a disputed element; its inclusion did not render the claimed operational debt indisputable. Issue 5 - Application of Mobilox test Legal framework: Under Mobilox, the adjudicating authority must determine if a pre-existing dispute is plausible and not a feeble or spurious defence; it must not adjudicate merits. Precedent treatment: The Court followed Mobilox, applying its test to the pleaded facts, payments, discrepancies and reconciliation requests. Interpretation and reasoning: Applying Mobilox, the Tribunal found that the defence raised was not illusory: rival factual assertions on payments, appropriation, invoice discrepancies and interest rendered the defence plausible and necessitated further investigation. The Adjudicating Authority's reliance on this test to dismiss the Section 9 petition was correct. Ratio vs. Obiter: Ratio - Mobilox's plausibility standard governs Section 9 admissibility; Obiter - commentary on specific items which may be litigated elsewhere. Conclusion: Mobilox was correctly applied; the existence of a plausible pre-existing dispute warranted rejection of the Section 9 petition.