2025 (11) TMI 1206 - AT - IBC

Section 9 IBC insolvency plea rejected; pre-existing dispute via Undertaking meets Mobilox test, appeal dismissed

NCLAT upheld the rejection of the operational creditor's petition under Sec.9 IBC, holding that a pre-existing dispute existed between the parties. ... Rejection of section 9 petiiton - pre-existing dispute between the parties - respondent has not produced any evidentiary material to support that there has been a GST investigation into its affairs - HELD THAT:- The bottom line for sustaining a petition under Sec.9 IBC is the existence of a crystallized debt and its default in payment when the debt has fallen due for payment. So far as the present case is concerned, the respondent does not dispute that the appellant has not supplied the goods, nor does it challenge the quantity and quality of the goods supplied nor does it dispute the value of the goods so supplied. At least the respondent has not raised any such dispute at any time either prior to the issuance of statutory demand notice under Sec.8 IBC or even in its reply to Sec.8. Since the respondent’s refusal to pay the sum stems from the document of Undertaking, if the appellant were to deny it (which it is not seen to have done), then it will require an enquiry on facts, which is a forbidden terrain for this tribunal as it falls within the domain of the civil court. If on the other hand, if the undertaking is admitted then it does sustain the respondent’s apprehension - The appellant defends the contention of the respondent with its contention that the respondent has not produced any evidentiary material to support that there has been a GST investigation into its affairs, and even if any, it does not affect or impact its right to claim any antecedent debt to which it was entitled to, nor is there a moratorium on its debtors from making payment of their outstanding dues. This argument is impressive, and could have even persuaded us, if only the document of undertaking has not intervened. The undertaking therefore remains unaffected, and it continue to sustain the apprehension of the respondent. After all this tribunal is only concerned with the state of affairs as at the time of filing the petition under Sec.9 IBC. The rule in Mobilox Innovations case only requires that the existence of a pre- existing dispute between the parties must at least be a plausibility. This plausibility having been established by the respondent, it is not found that approach to the Adjudicating Authority to the issue before it and the outcome of its consideration are erroneous as to warrant an interference. Appeal dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether a petition under Section 9 of the Insolvency and Bankruptcy Code is maintainable where the corporate respondent (debtor) raises an apprehension of denial/rejection of Input Tax Credit (ITC) due to alleged GST proceedings against the operational creditor (supplier), but does not dispute supply, quantity, quality or the quantum of the claimed debt. 2. Whether a pre-existing dispute exists for the purposes of Section 9 of the IBC where the respondent conditions payment on an undertaking/indemnity and/or the furnishing of a bank guarantee to secure alleged tax exposure, and whether such a condition, if made prior to the Section 8 demand notice, suffices to bar a Section 9 petition. 3. The extent to which an undertaking by the operational creditor (promising GST payment, ensuring recipient's ITC and indemnification on denial of ITC) impacts the existence of a plausible/bona fide dispute and the scope of adjudication under Section 9 (i.e., whether an enquiry into factual matters arising from such an undertaking is permissible in the insolvency forum). 4. The applicability and scope of the Mobilox Innovations ratio (existence of a plausible/bona fide dispute prior to the demand notice) to disputes rooted in statutory/commercial tax consequences (GST/ITC) and contractual undertakings. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Maintainability of Section 9 petition where respondent raises GST/ITC apprehension but accepts supply and quantum Legal framework: Section 9 of the IBC permits a corporate insolvency resolution process on receipt of an application by an operational creditor upon occurrence of default; Section 8(1) requires a demand notice before filing. The adjudicatory approach requires a crystallized debt and default; however, the existence of a pre-existing dispute (if plausible/bona fide and raised prior to the demand notice) negates maintainability (ratio in Mobilox Innovations). Precedent Treatment: The Court follows Mobilox Innovations (existence of even a plausible/bona fide dispute prior to issuance of demand notice is sufficient to reject Section 9) and related jurisprudence that restrains adjudication where a bona fide dispute exists; those authorities are applied, not overruled or distinguished. Interpretation and reasoning: The Tribunal emphasises that the respondent did not challenge supply, quality, quantity or amount, but anchored its refusal/withholding on a tax-related apprehension coupled with reliance on an earlier written undertaking. The Court finds that acceptance of supply and quantum does not ipso facto negate a plausible dispute where payment is conditioned on tax-related security/indemnity. The adjudicatory test is the state of affairs at the time of filing and whether a plausible dispute existed prior to the Section 8 notice; the respondent's position created such plausibility. Ratio vs. Obiter: Ratio - where a respondent's payment refusal is based on a plausible apprehension of denial of ITC (rooted in an earlier undertaking and contemporaneous communications), that constitutes a pre-existing dispute sufficient to defeat maintainability under Section 9. Obiter - observations on the absence of GST show-cause notices by tax authorities (not outcome-determinative here). Conclusions: The Court concluded that the Section 9 petition was not maintainable because a plausible pre-existing dispute existed at the time of filing, even though the respondent did not contest supply or quantum. Issue 2 - Effect of pre-existing undertaking/indemnity and condition of bank guarantee on existence of dispute Legal framework: Contractual undertakings and indemnities between commercial parties bear on whether a dispute exists; Mobilox requires that such a dispute be bona fide/plausible and pre-date the Section 8 notice. The insolvency forum should not enter into detailed factual enquiries reserved for civil courts. Precedent Treatment: The Tribunal treats Mobilox as authoritative that plausibility of dispute suffices; no precedent is overruled. The Tribunal reiterates that matters requiring factual determination or extended enquiry (e.g., existence/authenticity/effect of undertaking) fall outside the insolvency adjudicator's role where the dispute is bona fide. Interpretation and reasoning: The document of undertaking contained specific covenants to pay GST, to ensure the buyer's ITC, and to indemnify the buyer for denial of ITC - and was executed contemporaneously with the relevant commercial transactions. The respondent's insistence on security/bank guarantee and reliance on that undertaking pre-dated or coincided with dealings; the supplier's silence in denying the undertaking and failure to produce proof of GST payment or of uninterrupted ITC for the respondent fortified the plausibility of the respondent's apprehension. Given this, the Tribunal held that the undertaking sustains a plausible pre-existing dispute over payment conditions. Ratio vs. Obiter: Ratio - an express undertaking by the supplier to secure the recipient's ITC and to indemnify the recipient in case of denial of ITC, accepted or not denied by the supplier, can create a plausible pre-existing dispute that bars a Section 9 petition. Obiter - guidance that the supplier could have adduced proof of GST payment or non-denial of ITC to rebut the apprehension. Conclusions: The undertaking operated as a substantive ground for the respondent's withholding of payment and constituted a pre-existing dispute preventing the Section 9 petition from proceeding. Issue 3 - Prohibition on factual enquiry and the insolvency forum's limited scope Legal framework: The insolvency adjudicator is concerned with existence of debt and default and with whether any plausible bona fide dispute existed prior to the demand; it must refrain from conducting deep factual investigations which are the province of civil courts. Precedent Treatment: The Court follows established limitations on the jurisdiction of insolvency tribunals to undertake detailed factual adjudication when a bona fide dispute is pleaded; Mobilox's requirement of plausibility avoids entering into complex fact-finding. Interpretation and reasoning: Two alternative approaches arise: (a) deny the undertaking and require factual determination (not permissible in the insolvency forum); or (b) admit the undertaking, in which case the undertaking itself sustains the respondent's apprehension. Because the creditor did not disavow the undertaking or furnish exculpatory proof (e.g., payment of GST, non-denial of ITC), the Tribunal applied the settled principle that it should not venture into a civil-style inquiry and accepted that the undertaking created at least a plausible dispute. Ratio vs. Obiter: Ratio - where the existence of a bona fide dispute turns on contested facts or documents (e.g., undertaking), the insolvency forum must decline to proceed under Section 9 rather than conduct a trial; acceptance/admission of the document, or plausibility thereof, is sufficient to bar Section 9. Obiter - the note that the creditor might have rebutted plausibility by adducing proof of GST payment or demonstrable absence of ITC denial. Conclusions: The Tribunal held that a fact-bound enquiry into the undertaking or into GST proceedings was not permissible; the undertaking's existence and its operational effect on the respondent's commercial decision supplied the required plausibility to reject Section 9. Issue 4 - Application of Mobilox Innovations ratio to tax/ITC-related commercial disputes Legal framework: Mobilox requires that a pre-existing dispute be plausible/bona fide and antecedent to the demand notice; it is applicable across categories of commercial disputes, including those involving statutory tax consequences that affect payment obligations. Precedent Treatment: The Tribunal expressly applies Mobilox, treating the rule as encompassing disputes where statutory/regulatory apprehensions (such as potential denial of ITC) underpin withholding of payment. Interpretation and reasoning: The Tribunal reasons that a dispute about the safety of availing ITC (and attendant indemnity obligations) is as much a commercial dispute as any other; when such a dispute is plausible and pre-existing, Mobilox displaces the insolvency remedy. The Tribunal emphasizes timing (pre-existing before Section 8) and plausibility, not mere speculation; here, timing and the undertaking produce plausibility. Ratio vs. Obiter: Ratio - Mobilox's plausibility test applies to disputes arising from tax/ITC issues and contractual indemnities; a plausible apprehension grounded in contemporaneous undertaking and communications suffices to reject Section 9. Obiter - comments on the absence of formal GST proceedings do not alter application of Mobilox where documentary undertakings and contemporaneous conduct establish plausibility. Conclusions: Mobilox governs; the pre-existing plausible dispute relating to GST/ITC and the undertaking justified dismissal of the Section 9 petition and affirmed the Adjudicating Authority's approach.