2025 (12) TMI 823 - AT - IBC

Insolvency admission u/s9 IBC upheld; alleged disputes u/ss5(6), 8(2)(a) found sham and contrived by corporate debtor

NCLAT upheld admission of the s.9 IBC application against the corporate debtor, finding a clear operational debt and default above the statutory threshold ... Admission of section 9 application - Pre-Existing Dispute or not - Impact of Police Complaint to justify dispute - Corporate Debtor (appellant) failed to make the entire outstanding amount despite repeated requests - operational debt and default was above the threshold limit or not - HELD THAT:- This Tribunal is not precluded from taking a call on the plausibility of the cash receipts as a ground of genuine pre-existing disputes. It is found that two cash receipts of different periods bear the same date of 30.04.2019. It defies both common logic as well as standard business practice that any entity making cash payment would not insist on a receipt immediately on making the cash payment. Even on giving the benefit of doubt to the Appellant that they were in the practice of obtaining consolidated cash receipts from the Operational Creditor such delayed acknowledgement of a cash transaction of such a big amount is quite uncharacteristic in the ordinary course of business or commercial arrangement. However, what strikes a more discordant note is that the Appellant has conspicuously failed to explain as to why these cash receipts were never brought to the attention of any authority or any agency by them before the commencement of the Section 9 proceedings in the event that they were already available with them. The plea of alleged cash payments and supporting cash receipts was never made part of the police complaints but has been introduced for the first time only in reply to the Section 9 petition. This brings us to another ground of pre-existing dispute which has been vehemently contended by the Appellant as borne out by the fact that that the Corporate Debtor had filed a police complaint at Indore on 08.08.2019 complaining against the Operational Creditor that their henchmen had unlawfully threatened and tried to illegally extract money from them. The Corporate Debtor had also intimated Commissioner of Police, Mumbai on 09.08.2019 complaining about their apprehension that the Operational Creditor may lodge a false case against them. Both these police complaints were prior to the Section 8 Demand Notice and thus in chronological terms clearly pre- existing. Repelling the contentions of the Appellant, it is contended by the Operational Creditor that reliance upon these police complaints cannot be said to constitute a pre-existing dispute as the focus of the complaint was on personal threats and not linked to any commercial dispute arising out of the present operational debt. It was submitted that any valid dispute under Section 5(6) read with Section 8(2)(a) of the IBC ought to relate directly to the operational debt and no such articulation having been made in the police complaints, to contend that the police complaints signified a pre-existing dispute was misconceived and untenable - there are substance in the contention of the Respondent that the defence of pre-existing dispute cannot succeed basis such police complaints which complaints do not bear any direct linkage or have clear-cut nexus with the operational debt. The Tribunal is not convinced that the disputes are genuine, real or pre-existing. Once the dispute raised appears to be an eyewash which do not truly exist in fact, the Adjudicating Authority cannot be faulted for exercising its discretion in admitting the Section 9 application against the Corporate Debtor. Present is a case where the Adjudicating Authority was not satisfied, for reasons cogently explained in the impugned order, with the purported disputes raised by the Appellant and hence proceeded to allowed the Section 9 application which action was not violative of the Mobilox judgement [2017 (9) TMI 1270 - SUPREME COURT]. It is inclined to agree with the Adjudicating Authority that the Corporate Debtor cannot claim immunity from Section 9 proceeding initiated by the Operational Creditor for such contrived, improvised and moonshine disputes. The Appellant has clearly defaulted in the payment of operational debt above the prescribed threshold level and further in the absence of any discernible and bonafide pre-existing dispute, the impugned order passed by the Adjudicating Authority admitting the application under Section 9 of IBC filed by the Operational Creditor is sustained. There are no merit in this appeal - appeal dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether a 'pre-existing dispute' within the meaning of the Insolvency and Bankruptcy Code, 2016 was established so as to bar admission of the application under Section 9. 1.2 Whether alleged cash payments supported by disputed cash receipts constituted a plausible ground of dispute capable of negating default under Section 9. 1.3 Whether police complaints, a subsequent civil suit, and anticipatory bail proceedings constituted evidence of a 'pre-existing dispute' relating to the operational debt. 1.4 Whether the reply/Notice of Dispute to the Section 8 demand notice disclosed any coherent, bona fide dispute capable of resisting admission under Section 9. 1.5 Whether filing of two separate Section 9 applications by two sole-proprietorship concerns of the same individual, and the status of a sole proprietorship, affected the maintainability of the Section 9 proceeding. 1.6 Whether operational debt and default above the statutory threshold were proved so as to justify admission of the Section 9 application. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Existence and nature of 'pre-existing dispute' under the IBC Legal framework 2.1 The Tribunal proceeded on the legal test set out by the Supreme Court in the decision commonly referred to as 'Mobilox Innovations', namely that: (i) a dispute must exist prior to the Section 8 demand notice; (ii) it must relate to the debt claimed; and (iii) it must be real, bona fide and supported by sufficient evidence, not a mere bluster or 'moonshine'. Sections 5(6), 8(2)(a) and 9 of the IBC were applied to assess whether such a dispute existed. Interpretation and reasoning 2.2 The Tribunal examined each head of defence (alleged cash payments, police complaints, civil suit, anticipatory bail proceedings, and assertions in the Notice of Dispute) to determine whether, individually or cumulatively, they satisfied the Mobilox standard of a genuine and substantiated pre-existing dispute directly relating to the operational debt. 2.3 It was held that the jurisdiction in Section 9 matters is summary; neither the Adjudicating Authority nor the Appellate Tribunal can conduct a full evidentiary trial or determine allegations of forgery, but they can assess whether the disputes raised are plausible or merely contrived to avoid insolvency. Conclusions 2.4 The Tribunal concluded that no genuine, real, or adequately substantiated pre-existing dispute relating to the claimed operational debt was demonstrated, and therefore the bar to admission under Section 9 on account of 'pre-existing dispute' was not attracted. Issue 2: Alleged cash payments and disputed cash receipts as ground of dispute Interpretation and reasoning 2.5 The Corporate Debtor asserted that Rs. 1,81,84,460/- had been paid in cash to the Operational Creditor, supported by three cash receipts and cash withdrawals from bank accounts, and that all such payments and invoices were reflected in its books of accounts and ledgers. 2.6 The Adjudicating Authority had rejected the cash-payment defence on the grounds that: (i) the receipts were unsigned; (ii) large cash payments are unusual in B2B transactions; and (iii) there was no independent corroboration beyond self-serving ledger entries. The Tribunal examined these findings. 2.7 The Tribunal noted material inconsistencies: (i) the three cash receipts totalled approximately Rs. 1.81 crore whereas the Corporate Debtor's own 'cash withdrawal table' showed a different figure of around Rs. 1.87 crore; (ii) two receipts of different alleged transactions bore the same date (30.04.2019); (iii) for periods when large cash payments were claimed, the bank statements showed either nil or negligible corresponding withdrawals, and no other explanation or disclosure of the source of cash was offered. 2.8 The Tribunal emphasised that, although it cannot decide forgery, it can consider the plausibility of such documents as a basis for a dispute. It found it implausible that: (i) very large cash payments would be acknowledged by delayed, consolidated receipts of the kind produced; and (ii) if these receipts genuinely existed, they would not have been mentioned in contemporaneous police complaints, in the statutory reply to the Section 8 notice, or in the civil suit, and would surface only later in the reply to the Section 9 application. 2.9 The Tribunal considered this belated introduction of the cash-receipt story, coupled with silence in prior documents, as indicative of an afterthought and an 'improvised' or 'contrived' defence, aligning with precedent where large uncorroborated cash payment claims were rejected as moonshine. Conclusions 2.10 The alleged cash payments and cash receipts were held not to constitute a bona fide or plausible ground of dispute. The defence was treated as an afterthought and a moonshine dispute incapable of negating default or establishing a pre-existing dispute. Issue 3: Police complaints, civil suit, and anticipatory bail proceedings as evidence of pre-existing dispute Legal framework 2.11 The Tribunal referred to Section 5(6) read with Section 8(2)(a) of the IBC and applied the principle that a 'dispute' must directly relate to the operational debt in question. Reliance was placed on appellate precedent holding that: (i) the dispute must correlate with the amount claimed by the operational creditor; and (ii) suits or proceedings initiated after the statutory demand notice cannot be treated as 'pre-existing disputes'. Police complaints 2.12 The Corporate Debtor relied on two police complaints filed before the Section 8 demand notice, claiming that these showed a pre-existing commercial dispute. 2.13 On examining the texts of the complaints, the Tribunal found their thrust to be allegations of intimidation, threats and pressure for payment and 'settlement of accounts', with no clear reference to specific invoices, supply of goods, quality/quantity disputes, or detailed commercial issues related to the operational debt. They were essentially pleas for protection from alleged coercion and anticipated false cases. 2.14 The Tribunal noted that two versions of the 08.08.2019 complaint (bearing the same time-stamp) existed: in one, the Corporate Debtor claimed a small amount was receivable from the Operational Creditor, and in the other, it admitted owing a significantly larger amount to the Operational Creditor. This inconsistency, not denied by the Corporate Debtor, suggested shifting stands and undermined credibility. 2.15 The absence of any mention of the alleged cash receipts or specific invoice-related disputes in these complaints further weakened their evidentiary value as proof of a pre-existing dispute on the operational debt. Civil suit and anticipatory bail proceedings 2.16 The Corporate Debtor relied on a civil suit filed in the District and Sessions Court and on observations in an order in anticipatory bail proceedings arising from a criminal complaint by the Operational Creditor, arguing that these showed that disputes had a 'commercial' genesis. 2.17 The Tribunal found that the civil suit was filed after issuance of the Section 8 demand notice and even after the filing of the Section 9 application, and in line with established precedent, held that any such subsequent suit cannot qualify as a 'pre-existing dispute' under Section 5(6). 2.18 As regards the anticipatory bail proceedings and the High Court's prima facie observation that the offences had genesis in commercial disputes, the Tribunal held that such criminal proceedings, initiated post Section 8 notice and addressing bail considerations, were not determinative of the existence or non-existence of operational debt or default, and could not retroactively create a pre-existing dispute under the IBC. Conclusions 2.19 The police complaints were found to be primarily about alleged threats and coercion, inconsistent and not directly relatable to the operational debt or to specific invoices/supplies; they therefore did not satisfy the Mobilox test or the requirement of direct nexus under Section 5(6) and Section 8(2)(a). 2.20 The civil suit and anticipatory bail proceedings, having been initiated after the statutory notice and/or Section 9 filing, were held incapable of constituting pre-existing disputes within the meaning of the IBC. 2.21 Collectively, these proceedings were held insufficient to evidence any bona fide commercial dispute predating the demand notice in relation to the operational debt claimed. Issue 4: Adequacy and credibility of the Notice of Dispute (reply to Section 8 notice) Interpretation and reasoning 2.22 The Tribunal scrutinised the contents of the Corporate Debtor's reply dated 26.10.2019 to the Section 8 demand notice to see whether it raised a coherent and plausible dispute. 2.23 The reply contained mutually inconsistent assertions: (i) denial of any written agreement and even of placing any purchase order (telephonic or otherwise); (ii) allegations that the Operational Creditor had fraudulently created/manipulated invoices and that goods were never supplied; (iii) simultaneous assertion that all material purchased from the Operational Creditor had been paid for in full and that no outstanding amount was due. 2.24 The Tribunal highlighted the inherent contradiction between denying any supply of goods or valid invoices and, at the same time, claiming that all material purchased had been fully paid. If no goods were supplied or invoices received, the basis for making any payments, especially large cash payments, was unintelligible. 2.25 Critically, the reply did not disclose the alleged cash receipts or provide concrete details or proof of cash payments or prior settlement of accounts. Nor did it expand on any substantive commercial dispute concerning quality/quantity or price of goods. 2.26 The only 'dispute' specifically articulated in the reply was the existence of the earlier police complaints, which, as already found, did not relate directly to the operational debt and were themselves inconsistent. Conclusions 2.27 The reply/Notice of Dispute was found to be self-contradictory, vague, and lacking in material particulars. It neither presented a coherent commercial dispute nor substantiated any specific contest over the claimed debt. 2.28 In light of its internal inconsistencies and omissions, the reply was held insufficient to establish a bona fide pre-existing dispute as contemplated by the IBC and the Mobilox standard. Issue 5: Maintainability of the Section 9 application - multiple proprietorships and juristic status Interpretation and reasoning 2.29 The Corporate Debtor argued that filing of two separate Section 9 applications by two concerns (Haji Shahadat & Sons and Maaz Exports), both stated to be sole proprietorships of one individual under a common GST registration, amounted to an abuse of process, and also contended that a sole proprietorship is not a juristic person and hence cannot maintain a Section 9 petition. 2.30 The Tribunal noted that both concerns were distinct and separate business entities of the same proprietor and that they were seeking recovery of their respective operational debts. The Adjudicating Authority had already rejected the objection, and the Tribunal examined this reasoning. 2.31 Relying on its own prior decisions, the Tribunal reaffirmed that Section 9 applications filed by a sole proprietor, whether in their personal name or in the trade name, are maintainable under the IBC. Conclusions 2.32 Filing of separate Section 9 applications by each proprietorship concern did not amount to abuse of process and was held to be permissible where distinct operational debts were involved. 2.33 The objection that a sole proprietorship is not a juristic person and therefore cannot file a Section 9 application was rejected; Section 9 applications by sole proprietors in their own name or trade name were held to be maintainable. Issue 6: Proof of operational debt and default above threshold Legal framework 2.34 The Tribunal proceeded on the requirements of Sections 8 and 9 of the IBC - that an operational creditor must establish existence of an operational debt, its default above the prescribed threshold, service of a demand notice, and absence of a genuine pre-existing dispute. Interpretation and reasoning 2.35 The Operational Creditor produced invoices, delivery challans and e-way bills evidencing supply of iron and steel materials, along with a demand notice claiming an unpaid operational debt of Rs. 2,32,98,535/-, comprising principal and contractual interest. Bank and CA certificates were also placed on record to support the outstanding amount. 2.36 The Corporate Debtor did not effectively dispute that supplies were made or that the invoices were raised; its principal defence was that the dues had been fully paid in cash and that there was a pre-existing dispute. 2.37 Having rejected the alleged cash-payment defence and having found no bona fide pre-existing dispute, the Tribunal accepted the Adjudicating Authority's conclusion that an operational debt and default above the statutory threshold stood established. 2.38 The Tribunal also reiterated that the IBC is not a debt recovery forum but a resolution mechanism; however, once default of operational debt without genuine dispute is demonstrated, Section 9 admission follows, notwithstanding the Corporate Debtor's assertions of overall financial solvency. Conclusions 2.39 The Operational Creditor successfully proved the existence of an operational debt and default above the prescribed threshold, with requisite documentation. 2.40 In the absence of any discernible and bona fide pre-existing dispute, the admission of the Section 9 application was held to be justified and consistent with the governing legal principles. 2.41 The Tribunal upheld the order admitting the Corporate Debtor into CIRP, dismissed the appeal as devoid of merit, and affirmed the directions regarding fees/expenses of the Resolution Professional being defrayed by the Operational Creditor.