2025 (11) TMI 309 - AT - IBC

Section 9 petition dismissed as pre-existing dispute under Mobilox principles despite post-10-day notice after Section 8 demand

NCLAT affirmed dismissal of the Section 9 application, holding a pre-existing dispute barred the claim. Although the notice of dispute was served after ... Dismissal of Section 9 application filed by the Appellant - dismissal on grounds of pre-existing dispute - time barred calims or not - all pre-requisites of section 9 application fulfilled or not - HELD THAT:- A pre-requisite for filing a Section 9 application is laid down under Section 8 of the IBC which mandates the Operational Creditor to deliver a Demand Notice on the Corporate Debtor on occurrence of a default for payment of unpaid operational claims. Section 8(2) provides that Corporate Debtor on the receipt of the Demand Notice is required to bring to the notice of the Operational Creditor existence of dispute, if any, within a period of 10 days. Thus, the existence of dispute and its communication to the Operational Creditor is statutorily warranted in terms of Section 8 of the IBC. In the present facts of the case, the Section 8 Demand Notice was issued on 03.10.2019 by the Appellant while the Notice of dispute was raised on 01.12.2019 by the Corporate Debtor. It is an undisputed fact that the Notice of dispute was served upon the Appellant though beyond the stipulated ten days’ period. Be that as it may, it is also noticed that the Notice of dispute though beyond the ten days’ period, nevertheless it was well before the filing of the Section 9 application which was on 21.07.2020. It is well settled that as long as disputes existing between the parties are shown to have arisen prior to the Section 8 Demand Notice, it is sufficient basis for the Adjudicating Authority to reject a Section 9 application - in this case, once Notice of dispute is raised before the filing of the Section 9 application, even though it fails to comply to the window of ten days period assigned for this purpose, it does not lose its sanctity or relevance in signifying the presence of pre-existing disputes. Whether there was any discernible preexisting dispute surrounding the debt claimed to be due and payable by the Appellant-Operational Creditor? - HELD THAT:- The law on this subject has been laid down crystal clear by the Hon’ble Supreme Court in Mobilox Innovations Private Limited Vs. Kirusa Software Pvt Ltd [2017 (9) TMI 1270 - SUPREME COURT] where it was held that 'What is important is that the existence of the dispute and/or the suit or arbitration proceeding must be pre-existing i.e. it must exist before the receipt of the demand notice or invoice, as the case may be. In case the unpaid operational debt has been repaid, the corporate debtor shall within a period of the self-same 10 days send an attested copy of the record of the electronic transfer of the unpaid amount from the bank account of the corporate debtor or send an attested copy of the record that the operational creditor has encashed a cheque or otherwise received payment from the corporate debtor.' It is of no less significance to note that the email of 26.09.2017 was not issued at the initiative of the Corporate Debtor but was sent in response to the clarifications sought from the Corporate Debtor by the Appellant on 21.09.2017 with respect to the status of outstanding payments of first PI. Since their doubts had been clarified by the Corporate Debtor in a detailed email reply, the Appellant cannot claim that they were unaware of the existence of counter-claim dispute agitated by the Corporate Debtor before the LoA. Thus, there are no reasons not to agree with the Respondent that the Appellant had been kept abreast by them of their ongoing dispute with JTC in respect of the first PI. Since the JTC had purportedly delayed the supply of goods in respect of the first PI, concerns had been raised by the Corporate Debtor from time to time about the price differential in case the goods had to be sourced from the local market. These concerns were expressed through several e-mails which have been placed in the Reply affidavit of the Corporate Debtor to the Section 9 application filed before the Adjudicating Authority which remain uncontroverted - the Corporate Debtor had made it known to both JTC as well as the Appellant that payment for the goods against the third PI was not released to JTC due to non-settlement of claims of losses suffered by them on account of delayed shipment of goods by JTC under first PI compelling them to purchase goods at a higher price from alternative sources thereby incurring losses. Thus, the alleged loss incurred by the Corporate Debtor in the context of the first PI due to non-shipment of goods by JTC remained a matter of dispute between the parties. There are no good grounds to differ with the findings of the Adjudicating Authority that the Appellant was well aware of the fact before stepping into the shoes of the JTC that there was a pre-existing dispute between the Corporate Debtor and JTC and this was sufficient ground to dismiss the Section 9 application. The findings of the Adjudicating Authority dismissing the present Section 9 application on grounds of pre- existing dispute satisfied - it is not necessary or relevant to go into the other issues raised by the Respondent viz that the Section 9 application was barred by limitation or that the Appellant did not qualify to be an Operational Creditor since the LoA was an invalid and unregistered document which only provided right of subrogation and therefore the debt did not become legally assigned to the Appellant in terms of Section 5 (20) of the IBC. There are no reasons to modify the impugned order - appeal dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether there existed a pre-existing dispute in relation to the operational debt sufficient to mandate rejection of the Section 9 application under the Insolvency and Bankruptcy Code. 2. Whether an assignee of an operational debt (by a Letter of Assignment) qualifies as an Operational Creditor under Section 5(20) of the Code, and whether the validity/genuineness of such assignment falls within the limited scope of the Adjudicating Authority at the Section 9 stage. 3. Whether an email of the corporate debtor (dated prior to the assignment) constituted an acknowledgement of debt or, alternatively, evidence of a counter-claim/pre-existing dispute that precludes initiation of insolvency proceedings. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Existence of pre-existing dispute for rejection of Section 9 application Legal framework: Sections 8 and 9 of the Code require delivery of a demand notice, a 10-day window for the corporate debtor to communicate existence of dispute, and empower the Adjudicating Authority to reject a Section 9 application where notice of dispute is received or there is record of a dispute. Precedent treatment: The Tribunal applied established Superior Court guidance that the dispute must be pre-existing (i.e., arising before receipt of the demand notice) and that the adjudicator at the admission stage must determine whether a plausible, non-spurious dispute exists requiring further adjudication, without deciding merits. Interpretation and reasoning: The corporate debtor replied to the demand notice with a detailed notice denying liability and asserting a counter-claim arising from non-shipment and consequent losses under an earlier purchase order. That reply, though beyond the formal ten-day window, was sent before filing of the Section 9 application and therefore retained operative effect. Documentary email exchanges predating the assignment (and the demand notice response) corroborated the existence of the dispute. The Tribunal emphasized that the purpose of the Code is not to convert insolvency proceedings into debt recovery or to resolve operational disputes; where a plausible pre-existing dispute exists, the Section 9 application must be rejected at the threshold. Ratio vs. Obiter: Ratio - A plausible, pre-existing dispute, even if notice is received beyond the 10-day window but prior to filing of Section 9, can justify rejection of a Section 9 application; the adjudicator need only assess plausibility, not decide merits. Obiter - Observations on creditor conduct or commercial ethics not central to legal holding. Conclusion: The Adjudicating Authority correctly found a pre-existing dispute and was justified in rejecting the Section 9 application on that ground. Issue 2 - Status of assignee as Operational Creditor and scope to examine validity of assignment at Section 9 stage Legal framework: Section 5(20) defines Operational Creditor; Section 8/9 procedures follow from that status. The Code contemplates summary threshold scrutiny at admission stage; detailed adjudication on validity of assignments generally proceeds in civil fora. Precedent treatment: The Tribunal referenced the established principle that the validity/genuineness of an assignment is ordinarily not to be gone into in detail in summary insolvency admission proceedings and that the assignee may, prima facie, step into the assignor's shoes, subject to contest in appropriate fora. Interpretation and reasoning: Although the respondent raised defects in the Letter of Assignment (alleged absence of signatures/seal, stamping, registration, absence of insurance agreement), the Tribunal found it unnecessary to determine these contentions because the Section 9 application was properly dismissed on the independent ground of pre-existing dispute. The Tribunal thereby avoided an admission-stage determination of the assignment's legal sufficiency. Ratio vs. Obiter: Ratio - Where a Section 9 application is dismissed on the ground of pre-existing dispute, the Adjudicating Authority need not adjudicate the legal sufficiency of a purported assignment; Obiter - Observations that assignment issues may be litigated in other competent fora. Conclusion: The question whether the assignee qualified as Operational Creditor (by virtue of the LoA) was left open as unnecessary to decide; dismissal on pre-existing dispute was dispositive. Issue 3 - Characterisation of pre-assignment email: acknowledgement of debt versus evidence of counter-claim Legal framework: At the admission stage the adjudicator must distinguish between a clear unequivocal admission of liability (which may support a Section 9 filing) and communications constituting denial and assertion of counter-claims that create a dispute. Precedent treatment: The controlling standard requires that a dispute not be a patently feeble legal argument or unsupported assertion; the presence of factual content and documentary support makes a dispute plausible. Interpretation and reasoning: The corporate debtor's email dated prior to assignment set out factual allegations of delayed shipment, losses incurred due to higher market prices, repeated communications seeking settlement, payments made elsewhere, and an express assertion that payment on the third invoice was withheld pending settlement of losses under the first contract. The Tribunal held the email was a denial of liability coupled with articulation of a counter-claim and was not an unequivocal acknowledgment of the debt. The email, together with contemporaneous emails evidencing complaints about non-shipment, rendered the dispute plausible and non-spurious. Ratio vs. Obiter: Ratio - An email that articulates factual complaints and asserts a counter-claim relating to an earlier unfulfilled contract constitutes evidence of a pre-existing dispute and cannot be treated as an unequivocal admission of debt for Section 9 purposes; Obiter - Comments on the sequencing of assignment and receipt of the email. Conclusion: The 26.09.2017 email did not amount to acknowledgement of undisputed debt; rather it evidenced a bona fide dispute pre-dating the assignment and the demand notice, justifying rejection of the Section 9 petition. Ancillary observations 1. The Tribunal emphasized that insolvency proceedings under the Code are summary in nature and not intended to resolve inter se commercial disputes; where a real dispute exists, admission is inappropriate. 2. Because the appeal failed on the pre-existing dispute ground, the Tribunal declined to decide other contentions (limitation, stamping/registration/validity of assignment), leaving those issues open for appropriate forums. 3. The appellant was granted liberty to pursue alternative legal remedies before competent fora; no costs were imposed.