Section 9 IBC claim rejected due to pre-existing dispute; Mobilox applied, creditor directed to pursue contractual remedies

The NCLAT upheld the Adjudicating Authority's refusal to admit the Section 9 IBC application filed by the operational creditor, holding that there was a genuine pre-existing dispute regarding alleged deficiencies and non-completion of work. The Tribunal noted that the corporate debtor had never acknowledged the claimed dues and had contemporaneously raised objections, as evidenced by email correspondence. Applying the ratio in Mobilox, the Tribunal held that the defence was not a moonshine defence and that such contested issues could not be adjudicated in a summary insolvency proceeding under Section 9. The appeal was dismissed, without prejudice to the creditor's contractual recovery remedies.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether there existed a pre-existing dispute between the parties in respect of the claimed operational debt, warranting rejection of the application under Section 9 of the Insolvency and Bankruptcy Code.

1.2 Whether the defence raised by the corporate debtor to the operational creditor's claim was a mere "moonshine defence" or a plausible contention within the meaning of the law laid down in relation to Section 9(5)(i)(d) of the Insolvency and Bankruptcy Code.

1.3 Whether issues relating to alleged deficiencies in services, non-completion of work and warranty disputes between the parties could be adjudicated in proceedings under Section 9 of the Insolvency and Bankruptcy Code.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Existence of pre-existing dispute under Section 9 IBC

(a) Legal framework

2.1 The Tribunal referred to Section 9(5)(i)(d) of the Insolvency and Bankruptcy Code and the principles laid down by the Supreme Court in the decision reported as "Mobilox Innovations Private Limited v. Kirusa Software Private Limited", particularly paragraph 51, regarding the scope of "dispute" and the duty of the adjudicating authority while considering a Section 9 application.

2.2 As per the cited ratio, an application under Section 9 must be rejected if notice of dispute has been received by the operational creditor or there exists a record of dispute, and the adjudicating authority is only to see whether there is a plausible contention requiring further investigation and that the dispute is not spurious, hypothetical, illusory or a patently feeble argument.

(b) Interpretation and reasoning

2.3 The Tribunal examined contemporaneous correspondence from 2017 and 2018, including a letter dated 15.01.2018 and earlier communications dated 10.05.2017, 11.05.2017, 27.05.2017, 20.06.2017, 11.08.2017 and 12.08.2017, wherein the corporate debtor consistently raised concerns about delay, pendency and non-completion of works, resulting in substantial generation losses on a daily basis.

2.4 The Tribunal noted that through various emails in August 2017, the corporate debtor reiterated allegations of substandard quality of goods supplied, defective works and materials, suspension of warranty, abandonment of the project without formal handover, and unresolved critical issues such as faulty inverters, defective system designs and oil leakages.

2.5 The Tribunal then considered the operational creditor's email dated 21.02.2019, in which detailed outstanding amounts were claimed in respect of both projects, and the corporate debtor's immediate reply dated 22.02.2019. In this reply, the corporate debtor clearly stated that the operational creditor had not deducted the losses incurred due to non-completion of works and denial of services under warranty and indicated that it would review and revert.

2.6 The Tribunal held that the reply dated 22.02.2019 showed that the claim of the operational creditor was neither admitted nor acknowledged and that disputes were raised at the relevant time regarding losses, non-completion and warranty issues.

2.7 The Tribunal also noted that the demand notice under Section 8 was issued on 11.07.2022, more than three years after the alleged completion of work, and in the backdrop of an already existing chain of correspondence evidencing dispute.

(c) Conclusions

2.8 The Tribunal concluded that there was a clear, pre-existing dispute between the parties regarding the alleged operational debt, relating to non-completion of work, deficiencies, losses and warranty issues.

2.9 Consequently, the statutory requirement for rejection of the Section 9 application, in terms of the existence of a "dispute" under Section 9(5)(i)(d) of the Insolvency and Bankruptcy Code, stood satisfied.

Issue 2: Nature of the corporate debtor's defence - whether "moonshine defence"

(a) Legal framework

2.10 Relying on the principles in the Supreme Court's decision in "Mobilox Innovations Private Limited v. Kirusa Software Private Limited", the Tribunal reiterated that the adjudicating authority is only required to assess whether there is a plausible contention requiring further investigation, and whether the dispute is not spurious, hypothetical, illusory or a patently feeble legal argument; the merits of the dispute are not to be finally adjudicated at the Section 9 stage.

(b) Interpretation and reasoning

2.11 The operational creditor contended that the corporate debtor's reference to losses and warranty issues in the email dated 22.02.2019 was vague, unsupported by particulars, and hence amounted to a "moonshine defence".

2.12 The Tribunal rejected this contention by placing weight on the entire sequence of contemporaneous emails and letters from 2017 and 2018, which consistently recorded complaints about delay, non-completion, defective work, substandard materials, suspension of warranty and resultant generation losses.

2.13 In view of these contemporaneous documents and the corporate debtor's immediate response to the outstanding claim in February 2019, the Tribunal held that the defence was not merely a belated or concocted assertion but was grounded in existing factual correspondence.

(c) Conclusions

2.14 The Tribunal held that the corporate debtor's defence could not be characterised as a "moonshine defence" or as a patently feeble argument unsupported by evidence.

2.15 Applying the test laid down in Mobilox, the Tribunal concluded that there existed a real and plausible dispute which required further investigation and, therefore, the Section 9 application was liable to be rejected.

Issue 3: Appropriateness of Section 9 IBC proceedings for adjudicating underlying contractual disputes

(a) Interpretation and reasoning

2.16 The Tribunal noted that the issues raised by the corporate debtor concerned non-completion of work, deficiencies in services, defective goods and designs, generation losses and disputes over warranty obligations, all arising out of the contractual relationship between the parties.

2.17 The Tribunal observed that these issues involved factual and contractual adjudication which could not appropriately be undertaken within the limited, summary scope of proceedings under Section 9 of the Insolvency and Bankruptcy Code.

(b) Conclusions

2.18 The Tribunal held that the present matter was not fit for resolution through insolvency proceedings under Section 9 but rather by way of appropriate remedies available under the contract and general law.

2.19 While upholding the rejection of the Section 9 application, the Tribunal clarified that such rejection would not preclude the operational creditor from availing contractual and other legal remedies for recovery of its alleged dues.

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