2025 (11) TMI 1717 - AT - IBC

Operational creditor's Section 9 IBC plea revived; rental dues upheld despite no invoices and alleged pre-termination dispute

M/s RMV IT Services Pvt. Ltd. Versus M/s Red Eye Services Pvt. Ltd., Mumbai

NCLAT allowed the appeal filed by the operational creditor and set aside the NCLT order rejecting the Section 9 IBC application. It held that the ... Dismissal of section 9 application for initiation of CIRP of the Corporate Debtor - operational debt had emanated in pursuance of the terms of the six agreements between the two parties which required payments to be made to the Operational Creditor by the Corporate Debtor - operational debt was an undisputed debt which exceeded an amount of Rs. 1 lakh - default had been committed by the Corporate Debtor in respect of payment of such operational debt - HELD THAT:- It is pertinent to note that the Section 9 application was filed in 2019 in the present case when the threshold for initiation of Section 9 proceedings was only Rs. 1 lakh. Whether in the background of facts that invoices were not raised by the Operational Creditor, there was any operational debt which was due and payable by the Corporate Debtor? - HELD THAT:- It is still more pertinent to note that in this e-mail it has been admitted that though the Corporate Debtor is “already in trouble” it was somehow managing to pay their dues. This clearly tantamount to admission of debt. Even on the interest claimed by the Operational Creditor, the Corporate Debtor has not disputed the same but only made a request to dispense with the interest component on grounds of financial difficulties faced by them. In all fairness, the Corporate Debtor after seeking indulgence of the Operational Creditor to forego the interest amount also left the decision to the discretion of the Operational Creditor without disputing the computation of interest amount. This also cannot be viewed as a ground of dispute since the Operational Creditor had clarified that the interest was being charged in terms of the agreement. Once there is an admission of debt and default and the debt which is due and payable is found to meet the threshold limit, that is sufficient for admission of a Section 9 application. It is not for the Adjudicating Authority to go into the quantum of debt as long as the threshold limit is satisfied. The Adjudicating Authority therefore clearly fell in error in rejecting the Section 9 application while turning a blind eye to the admission of outstanding debt on the part of the Corporate Debtor. Whether the absence of rental invoices can be a tenable ground for the Corporate Debtor not to clear the outstanding rental dues? - HELD THAT:- It is clear that the Corporate Debtor was very much a party to pre-terminating the agreement and therefore was responsible to pay the balance rental charges. Furthermore, the agreements at Clause 21 clearly provided that if the Corporate Debtor terminated the contract before the end of the rental term, it would be bound to pay 100% rental of the first twelve months and 75% of the balance rental term. The contention of the Corporate Debtor is that the agreement was pre-terminated mutually and therefore they were not liable to pay balance rental charges. It has been contended that the amount of Rs. 1,30,29,552/- claimed by the Operational Creditor therefore signified existence of pre-existing dispute. This is a feeble defence as the e-mails on record shows that the Corporate Debtor had consciously pre-terminated the agreement. Moreover, we find force in the contention of the Operational Creditor that even if the balance rental dues are not factorised, the outstanding operational debt prior to pre-termination still exceeded the threshold limit. In the facts of the present case, the Operational Creditor had dutifully sent a Section 8 Demand Notice and thereafter filed the Section 9 application only after expiry of 10 days’ time. Thus, there is no sign or evidence of any violation or contravention of the statutory provisions of the IBC with regard to filing of either the Section 8 Demand Notice or Section 9 application. There is no statutory prescription of any time-frame for deposit of Section 9 application fees nor any embargo placed on filing of such application fees prior to issue of Section 8 Demand Notice or prior to receipt of reply to Section 8 Demand Notice from the Corporate Debtor - It is clearly preposterous on the part of the Adjudicating Authority to have rejected the Section 9 application of the present Appellant for displaying diligence in approaching the Adjudicating Authority for redressal of their grievance in accordance with law. The Corporate Debtor has defaulted in the payment of operational debt, of an amount exceeding Rs. 1 lakh, which amount had clearly become due and payable, and further in the absence of any pre- existing dispute, the impugned order of the Adjudicating Authority in admitting the application under Section 9 of IBC cannot be sustained. The Adjudicating Authority has erroneously rejected the application under Section 9 of IBC - the impugned order dated 25.08.2023 passed by the Adjudicating Authority rejecting the Section 9 application is set aside - appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether operational debt exceeding the statutory threshold existed, had become due and payable under the rental agreements, and whether default by the corporate debtor was established notwithstanding non-issuance of invoices after July 2018. 1.2 Whether alleged need for reconciliation of accounts, including a claimed unadjusted payment of Rs. 72 lakhs, constituted a 'pre-existing dispute' under Sections 8 and 9 of the Insolvency and Bankruptcy Code, 2016. 1.3 Whether the corporate debtor's liability to pay 'balance rental dues' for the remaining tenure subsisted upon pre-termination and return of equipment, and whether inclusion of such claim affected maintainability of the Section 9 application. 1.4 Whether prior deposit of Section 9 application fees before issuance of Section 8 demand notice rendered the application premature, mala fide, or otherwise not maintainable. 1.5 Whether non-disclosure, or alleged defective disclosure, in the affidavit under Section 9(3)(b) regarding receipt of a reply/notice of dispute invalidated the Section 9 application in light of the binding precedent. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Existence of operational debt exceeding threshold, due and payable, and default despite non-issuance of invoices Legal framework 2.1 The Court applied the three-fold test laid down in the decision interpreting Section 9 of the Insolvency and Bankruptcy Code, 2016, namely: (i) existence of 'operational debt' exceeding the threshold (Rs. 1 lakh at the relevant time); (ii) such debt being due and payable and unpaid; and (iii) absence of a pre-existing dispute or pendency of suit/arbitration prior to receipt of Section 8 notice. Interpretation and reasoning 2.2 It was undisputed that six agreements existed for supply of computer/IT products on rent/hire and that the corporate debtor had availed such services and paid rentals initially. The corporate debtor admitted non-receipt of invoices from July 2018 but sought payment and invoice details and ledger from the operational creditor. 2.3 Email correspondence showed: (a) the corporate debtor requested ledger and invoice details and agreed that the 'amount will finalise after our mutual discussion'; (b) upon receiving the ledger, it pointed out only a differential of Rs. 27,033/-, requested waiver of interest citing financial trouble, and acknowledged non-receipt of invoices for July 2018-February 2019; (c) the operational creditor accepted adjustment of Rs. 27,033/- and communicated a revised outstanding amount of Rs. 96,27,114.46/-, which was not controverted by any further record. 2.4 The Court held that these communications constituted clear admission of outstanding liability and crystallisation of operational debt prior to issuance of the Section 8 demand notice; the plea of further reconciliation lacked substance. 2.5 On non-issuance of invoices, the Court noted that under the rental agreements there was no contractual requirement that invoices must be raised as a condition precedent to rental becoming due; the corporate debtor was obliged to pay monthly rent by a specified date irrespective of invoices. Non-issuance of invoices, especially where GST exposure was cited as the reason, did not negate or postpone the accrual or enforceability of rental dues. 2.6 The Court found the Adjudicating Authority's approach contradictory: it accepted existence of debt but rejected the application on the basis that the amount claimed was allegedly in excess of what was payable and that no invoices were raised. Once admitted debt exceeded the statutory threshold and default was evident, the quantum beyond such admitted debt was not within the Adjudicating Authority's remit at the admission stage. Conclusions 2.7 Operational debt clearly existed under the rental agreements, had crystallised, exceeded Rs. 1 lakh at the relevant time, and had become due and payable but remained unpaid. 2.8 Non-issuance of invoices after July 2018 did not affect the existence, accrual, or enforceability of the operational debt and could not be relied upon as a defence to deny liability or default. 2.9 The Adjudicating Authority erred in entering into quantification beyond the threshold requirement and in treating absence of invoices as a ground to reject the Section 9 application. Issue 2: Alleged requirement of reconciliation and claim of Rs. 72 lakhs as a pre-existing dispute Interpretation and reasoning 2.10 The corporate debtor argued that payments of Rs. 72 lakhs made between July 2018 and March 2019 had not been adjusted, showing that accounts were not reconciled, creating a dispute akin to that recognised in another appellate decision where reconciliation of accounts amounted to dispute. 2.11 The Court examined the email trail and found that: (a) the corporate debtor had full opportunity to raise reconciliation issues when ledger entries were shared; (b) it only sought adjustment of Rs. 27,033/- and requested waiver of interest; (c) after the operational creditor adjusted Rs. 27,033/- and confirmed the final outstanding amount, no further reconciliation request or reference to Rs. 72 lakhs appeared prior to the Section 8 demand notice. 2.12 The absence of any mention of such a substantial alleged payment in contemporaneous emails, despite the corporate debtor's attention to a relatively minor discrepancy of Rs. 27,033/-, led the Court to characterise the later plea of non-adjustment of Rs. 72 lakhs in the reply to the Section 8 notice as an afterthought devised to avoid liability. 2.13 The Court distinguished the relied-upon appellate decision on reconciliation of accounts, noting that in that case dispute on reconciliation had been consistently raised prior to the Section 8 notice, unlike the present case where the corporate debtor had effectively accepted the ledger (subject only to Rs. 27,033/- adjustment and interest request). Conclusions 2.14 The claim that reconciliation of accounts remained pending and that Rs. 72 lakhs was unadjusted did not constitute a real or bona fide 'pre-existing dispute' under the IBC test. 2.15 The third limb of the governing test-absence of credible pre-existing dispute prior to the Section 8 notice-was satisfied, and the Adjudicating Authority erred in regarding reconciliation as a bar to admission. Issue 3: Liability for balance rental dues after pre-termination and return of equipment Interpretation and reasoning 2.16 Part-IV of the Section 9 application showed a total default claim of Rs. 2,26,56,666/-, comprising Rs. 96,27,114/- towards rental payments and Rs. 1,30,29,552/- towards balance rentals allegedly due on account of implied pre-termination. 2.17 The corporate debtor contended that once the rented assets were taken back and the agreements were mutually terminated, no further rental for the remaining tenure could be claimed, and inclusion of such balance rentals reflected a dispute. 2.18 The Court examined the March 2019 emails and noted: (a) the operational creditor invoked breach of rental terms and called upon the corporate debtor to hand over specified equipment while reserving rights to recover dues with interest; (b) the corporate debtor responded that it, along with the operational creditor's representatives, had 'decided to pre-terminate all valid contracts and return the machines,' confirmed that most machines were returned and the balance would be returned, and sought discussion to 'close this.' 2.19 The Court held that these emails clearly indicated that the corporate debtor was an active participant in pre-terminating the contracts; hence, the contractual clause requiring payment of 100% rental for the first twelve months and 75% of the balance rental term in case of termination by the corporate debtor was attracted. 2.20 The defence that termination was mutual and hence balance rentals were not payable was treated as weak, given the explicit contractual stipulation and the debtor's own admission of pre-termination and ongoing return of machines. 2.21 The Court also accepted the operational creditor's argument that, irrespective of any dispute regarding balance rentals, the outstanding operational debt on account of rentals accrued prior to pre-termination itself exceeded the statutory threshold. Conclusions 2.22 Contractual liability for balance rentals upon pre-termination by the corporate debtor was supported by the agreement, and the debtor's own emails showed its conscious role in pre-terminating the contracts. 2.23 Even ignoring the component of balance rentals, the undisputed and crystallised rental dues prior to pre-termination were above the threshold, and therefore any alleged dispute about balance rentals could not defeat admission of the Section 9 application. Issue 4: Effect of prior deposit of Section 9 application fees before Section 8 demand notice Legal framework 2.24 The Court recapitulated the statutory scheme: Section 8(1) requires an operational creditor, upon default, to deliver a demand notice; Section 8(2) grants the corporate debtor 10 days to communicate existence of dispute; Section 9(1) allows filing of an application if no payment or notice of dispute is received; Section 9(5)(ii) mandates rejection if notice of dispute is received or recorded. Interpretation and reasoning 2.25 The Adjudicating Authority had inferred mala fides and 'pre-meditated mindset' from the fact that the operational creditor deposited the application fees for Section 9 on 16.05.2019, prior to issuing the Section 8 demand notice on 28.05.2019, and relied on this to reject the application. 2.26 The Court noted that the operational creditor in fact complied with the statutory sequence: served a Section 8 demand notice, waited out the mandatory 10-day period, and only thereafter filed the Section 9 application. 2.27 The Court found no provision in the IBC prescribing any time-frame or embargo regarding the date of deposit of application fees vis-à-vis issuance of the Section 8 notice or receipt of reply. Early deposit of fees was characterised as indicative of diligence to avoid delay, not as a legal infirmity or abuse. Conclusions 2.28 Prior deposit of Section 9 application fees, before issuance of the Section 8 notice, does not violate any provision of the IBC and cannot constitute a ground to reject the application. 2.29 The Adjudicating Authority's reliance on alleged 'pre-meditation' based solely on timing of fee deposit was legally unsustainable. Issue 5: Effect of affidavit under Section 9(3)(b) and non-disclosure of notice of dispute Legal framework 2.30 Section 9(3)(b) requires the operational creditor to file 'an affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt.' A binding Supreme Court decision has clarified that such an affidavit is logically possible only where no reply has been received from the corporate debtor within the 10-day period; if a reply is received, such an affidavit cannot be furnished in that strict form. Interpretation and reasoning 2.31 The Adjudicating Authority observed that the affidavit filed under Section 9(3)(b) did not specifically state whether any notice of dispute, not necessarily in the form of suit or arbitration, had been received, and treated this as non-compliance with Section 9(3)(b), contributing to rejection of the application. 2.32 The Court, referring to the Supreme Court's interpretation, held that where the corporate debtor has in fact replied to the Section 8 demand notice within the prescribed period, an affidavit stating that 'there is no notice given' cannot be furnished in literal terms and is not required in that form. 2.33 Guided by this precedent, the Court held that the reasoning in the impugned order which faulted the operational creditor's affidavit under Section 9(3)(b) was contrary to law. Conclusions 2.34 In circumstances where the corporate debtor has replied to the Section 8 demand notice, strict insistence on an affidavit under Section 9(3)(b) asserting non-receipt of any notice of dispute is misplaced and inconsistent with the binding Supreme Court interpretation. 2.35 The Adjudicating Authority's reliance on an alleged defect in the Section 9(3)(b) affidavit as a ground to reject the Section 9 application was legally erroneous. Overall conclusion and disposition 2.36 Applying the governing test, the Court found: (i) existence of operational debt exceeding Rs. 1 lakh; (ii) such debt due and payable and unpaid, with clear admission by the corporate debtor; and (iii) no credible pre-existing dispute raised prior to the Section 8 notice. 2.37 The impugned order rejecting the Section 9 application was set aside. Directions were issued to the Adjudicating Authority to admit the application upon production of the appellate order, after granting a one-month period for possible settlement between the parties, with liberty to place any such settlement before the Adjudicating Authority for appropriate orders.