2025 (12) TMI 119 - AT - IBC

Section 9 IBC claim rejected due to pre-existing dispute, Section 10A bar, and failure to meet default threshold

NCLAT upheld the NCLT's dismissal of the appellant-operational creditor's Section 9 IBC application on the ground of pre-existing dispute and failure to ... Dismissal of Section 9 Petition filed by the Appellant - dismissed on the ground of existence of a pre-existing dispute - Appellants contends that the findings of the Adjudicating Authority are based on erroneous appreciation of evidence and misapplication of the Mobilox Judgement [2017 (9) TMI 1270 - SUPREME COURT], necessitating interference by this Appellate Tribunal - 10A period invoices - HELD THAT:- The Appellant stresses that the NCLT’s role is confined to verifying debt existence, default, and statutory threshold compliance, and that a dispute relied upon to deny admission must not be speculative or an afterthought. In this case, they argue the Respondent raised quality issues only after the demand notice, rendering the dispute nonexistent for the purposes of the IBC proceeding. Conversely, the Respondent submits that the NCLT properly exercised its discretion by examining the evidence and context, finding a plausible and bona fide dispute. They emphasize that the Insolvency law requires consideration of whether a dispute is “plausible” rather than definitively resolved, which is satisfied here through extensive consumer complaints, internal communications, and manufacturer admissions. It is not a moonshine defense and in a plausible dispute and is a fit case for a pre- existing dispute, as contemplated by Section 8(2) of IBC or at the time of filing the Section 9 application, and to be a ground to nullify an application under Section 9. And it os not required to consider any other ground for entertaining the Appeal. 10A period invoices - HELD THAT:- This case can be decided solely bases the dispute which arises from disputed invoice of ₹ 26 lakhs as also the argument that invoices of 10A period amounting to ₹ 45,07,324/- has to be excluded and is more than sufficient to come to a conclusion that the Appellant doesn’t meet the threshold on top of all this if the arguments of a preexisting dispute is considered the Appellant doesn’t stand a chance to succeed under the Code and it may pursue other legal remedies. It is concluded that even though the Appellant claims that no real, prior dispute existed as all written evidence (emails, WhatsApp) before demand notice confirms liability and continuing business with requests for further supply, without raising product complaints. However, it is found that the counter arguments of the Respondent to be convincing that dispute existed much before demand notice as multiple harvesters malfunctioned; customers returned products; complaints, suits, and demand for replacements occurred in 2020–21; principal manufacturer acknowledged need for upgrades. Thus, in the facts and circumstances of the case we do not find that this is a case of moonshine defense, created by the respondent. Dispute existed prior to the issuance of Demand notice. There is no infirmity in the conclusions of the Adjudicating Authority that Section 9 petition cannot be admitted on the grounds of pre-existing dispute and on the issue of threshold - appeal dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether there existed a pre-existing dispute between the parties within the meaning of Sections 8 and 9 of the Insolvency and Bankruptcy Code, 2016, so as to bar admission of the Section 9 application. 1.2 Whether contractual interest claimed on the invoices could be included in determining the quantum of 'operational debt' and satisfaction of the minimum threshold under Section 4 of the Insolvency and Bankruptcy Code, 2016. 1.3 Whether Invoice No. TCIPL/GST/127 for Rs. 26,00,000/- was a genuine, undisputed invoice forming part of the operational debt, or a disputed/bogus claim liable to be excluded. 1.4 Whether the amounts arising from invoices whose defaults fell within the restricted period under Section 10A of the Insolvency and Bankruptcy Code, 2016 were liable to be excluded for the purpose of default and threshold computation, and, upon such exclusion (along with the disputed invoice and interest), whether the Section 9 application was maintainable. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Existence of pre-existing dispute under Sections 8 and 9 IBC Legal framework 2.1 The Court referred to Section 9(5)(ii)(d) of the Insolvency and Bankruptcy Code, 2016, which mandates rejection of an application if 'notice of dispute' has been received by the operational creditor or there is a record of dispute in the information utility. 2.2 The Court relied on the principles laid down in the decision in Mobilox Innovations, which held that at the admission stage the Adjudicating Authority must reject a Section 9 application if there exists a 'plausible contention' showing a dispute which is not spurious, illusory or mere bluster, without adjudicating the merits of such dispute. Interpretation and reasoning 2.3 The Court noted materials relied upon by the respondent indicating repeated malfunctioning and breakdown of harvesters supplied, returns and exchanges of machines, consumer complaints and litigation, and demands for replacements during 2020-21. 2.4 It took into account the letter of the principal manufacturer acknowledging that machines required 'upgradation of components', together with newspaper reports and other materials reflecting farmers' grievances and agitation concerning defective harvesters. 2.5 The Court accepted the respondent's case that several harvesters became unusable, were returned or abandoned, and that the respondent had to exchange or replace machines at its own cost, which led to commercial disputes regarding quality and performance of the supplied machines. 2.6 The Court held that these facts, taken cumulatively, constituted 'incontrovertible records' evidencing a dispute that existed prior to the Section 8 demand notice. It rejected the contention that the dispute was a moonshine, afterthought or merely raised in response to the demand notice. 2.7 Applying Mobilox, the Court held that the defence raised by the respondent was a plausible contention requiring further investigation and was not a patently feeble legal argument or assertion of fact unsupported by evidence. Therefore, once such notice of dispute existed, the Adjudicating Authority was bound, under Section 9(5)(ii)(d), to reject the Section 9 application. Conclusions 2.8 The Court concluded that there was a genuine, bona fide pre-existing dispute relating to the quality and performance of the machines and related claims, which pre-dated the demand notice. 2.9 On this ground alone, the Section 9 application was held to be not admissible, and there was no infirmity in the Adjudicating Authority's refusal to admit it. Issue 2 - Inclusion of contractual interest in 'operational debt' and threshold computation Legal framework 2.10 The Court considered Section 4 of the Insolvency and Bankruptcy Code, 2016 (minimum default threshold of Rs. 1 crore) and examined prior appellate rulings, including Comet Performance Chemicals and Rishabh Infra, where it was held that interest for delayed payment can be charged only if there is an express agreement between the parties, and unilateral interest clauses in invoices, not forming part of the contract, are unenforceable for IBC purposes. Interpretation and reasoning 2.11 The operational creditor had claimed that invoices contained terms stipulating interest at 24% per annum on delayed payments; the petition, however, claimed interest at 18% per annum, and both principal and interest were aggregated to arrive at total operational debt of Rs. 2,37,84,627.60. 2.12 The respondent disputed levy of interest, contending that the interest clause was unilaterally imposed, not traceable to any prior concluded agreement, and that the invoices did not consistently specify clear payment terms or the period from which interest would run, rendering the interest claim vague. 2.13 Relying on its own reasoning in Comet Performance, the Court held that no interest can be charged for delayed payment unless there is an express prior agreement between parties; mere boilerplate language in invoices, unbacked by a substantive contract, is insufficient. 2.14 The Court noted that the operational creditor had itself varied the interest rate (from 24% in invoices to 18% in the petition) unilaterally, and there was no demonstrated contractual basis enabling it to claim such interest as part of the operational debt. Conclusions 2.15 The Court concluded that interest claimed on the invoices lacked contractual foundation and could not be included for computing the 'operational debt' or for crossing the statutory threshold. 2.16 For further analysis, the Court treated the total operational debt as Rs. 1,64,89,928/- (principal amount only), and not Rs. 2,37,84,627.60 (principal plus interest). Issue 3 - Status of Invoice No. TCIPL/GST/127 for Rs. 26,00,000/- Interpretation and reasoning 2.17 The operational creditor asserted that Invoice No. TCIPL/GST/127 dated 09.08.2021 for Rs. 26,00,000/- represented the supply of two harvesters, priced at Rs. 13 lakh each, following concluded negotiations; it claimed that the respondent took delivery and did not raise any objection until litigation. 2.18 The respondent alleged that this invoice was 'bogus', issued unilaterally in August 2021 to overcome the bar under Section 10A, whereas the alleged goods were said to have been supplied in or about April 2020, with no delivery challan, bill of lading, or corroborative delivery documents on record. 2.19 The respondent relied on contemporaneous WhatsApp communications showing that price negotiations regarding the said harvesters remained inconclusive, and that the respondent had asked the supplier to 'keep the harvesters', indicating no finalized sale or agreed price as on the date of those chats. 2.20 The Court observed that the tax invoice itself did not disclose supporting delivery details or agreed terms, and that the correspondence indicated non-finalization of price and dispute on the transaction. Conclusions 2.21 The Court held that Invoice No. TCIPL/GST/127 for Rs. 26,00,000/- was a disputed invoice and could not be treated as an undisputed part of operational debt for the purposes of a Section 9 petition. 2.22 Accordingly, the amount of Rs. 26,00,000/- under this invoice was excluded from the principal claim of Rs. 1,64,89,928/- in computing the admissible operational debt. Issue 4 - Exclusion of invoices hit by Section 10A IBC and effect on maintainability and threshold Legal framework 2.23 The Court considered Section 10A of the Insolvency and Bankruptcy Code, 2016, which prohibits filing of any application for initiation of CIRP in respect of a default occurring on or after 25.03.2020 till 24.03.2021, and mandates that such applications 'shall never be filed'. 2.24 It referred to earlier decisions, including Comet Performance Chemicals and Decor Paper Mills, which held that invoices whose defaults fell within the Section 10A period must be excluded from default claims for the purpose of Section 9 applications, and that the Adjudicating Authority is duty-bound to scrutinise whether any part of the claim is barred by Section 10A, even if not formally raised as a defence. Interpretation and reasoning 2.25 The respondent produced a tabulated list of invoices raised between March 2020 and May 2020, aggregating to Rs. 45,07,324/-, whose due dates (calculated on agreed/payment or reasonable credit periods) fell during the Section 10A restricted window. 2.26 The Court accepted that, even where specific payment terms were not recorded on some invoices, a 30-day period from the date of invoice or receipt could be taken as a 'reasonable time' in line with trade practice and prior precedent (Manishaas Infratecho Solutions), resulting in the due dates of those invoices falling within the Section 10A bar period. 2.27 Applying the reasoning in Comet Performance and Decor Paper Mills, the Court held that defaults related to invoices whose due dates fell within the Section 10A period could not be used as the basis of a Section 9 insolvency application and must be excluded from computation of default and threshold. 2.28 The Court therefore deducted Rs. 45,07,324/- (invoices hit by Section 10A) and Rs. 26,00,000/- (disputed Invoice No. TCIPL/GST/127) from the principal claim of Rs. 1,64,89,928/-, yielding a balance of Rs. 93,82,604/-. 2.29 The Court also reiterated that this scrutiny is required even if the corporate debtor does not specifically raise Section 10A as a defence, as it is the duty of the Adjudicating Authority to ensure that claims barred by law are not used to trigger insolvency. Conclusions 2.30 After exclusion of (i) invoices whose defaults fell within the Section 10A window (Rs. 45,07,324/-), and (ii) the disputed invoice of Rs. 26,00,000/-, and (iii) disallowed interest, the operational debt that could legitimately form the basis of a Section 9 petition stood at Rs. 93,82,604/-, below the statutory threshold of Rs. 1 crore prescribed under Section 4 IBC. 2.31 Consequently, even apart from the existence of a pre-existing dispute, the Section 9 petition was independently not maintainable for failure to meet the minimum default threshold. Overall conclusion 2.32 The Court held that: (a) a bona fide, pre-existing dispute existed between the parties prior to issuance of the Section 8 demand notice; (b) claimed interest was not contractually enforceable and was to be excluded; (c) Invoice No. TCIPL/GST/127 for Rs. 26,00,000/- was disputed and excluded; and (d) invoices whose defaults fell within the Section 10A period were statutorily barred and excluded, resulting in the admissible debt falling below the Rs. 1 crore threshold. 2.33 On these grounds, the Court affirmed the Adjudicating Authority's order rejecting admission of the Section 9 application and dismissed the appeal, leaving the appellant to pursue other remedies outside the Insolvency and Bankruptcy Code.