Information Utility record and demand-notice reply showing pre-existing payment dispute led to rejection of s.9 IBC application.

A s.9 IBC application was admitted despite an Information Utility record reflecting a dispute. The NCLAT held that s.9 proceedings are summary and, under s.9(5)(ii)(d), the AA must reject an application where an "existence of dispute" is evidenced, including from the Information Utility record produced by the operational creditor itself; the AA's failure to consider the recorded dispute vitiated admission, and the admission order was set aside and the s.9 application rejected. Independently, the corporate debtor's reply to the demand notice constituted a notice of dispute and showed a pre-existing dispute regarding alleged excess payments, requiring rejection under s.9(5)(ii)(d); the appeal was allowed.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether the existence of a record of dispute in the Information Utility (showing the default status as "DISPUTED") mandated rejection of the operational creditor's application under Section 9(5)(ii)(d).

(ii) Whether a notice of dispute and other material on record conclusively established a pre-existing dispute between the parties, requiring rejection of the application under Section 9(5)(ii)(d) and rendering insolvency adjudication inappropriate for deciding the underlying accounting/set-off controversy.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Effect of "record of dispute" in Information Utility on maintainability of Section 9 application

Legal framework: The Court examined Section 9(5)(ii)(d), which obliges rejection of an application if either (a) notice of dispute has been received by the operational creditor, or (b) there is a record of dispute in the information utility.

Interpretation and reasoning: The record of default (Form D) filed by the operational creditor itself showed that the corporate debtor disputed the default upon authentication, and the status was "DISPUTED". The Court held that Section 9 proceedings are summary and are not meant to resolve disputes; therefore, once the Information Utility record reflects a dispute, the Adjudicating Authority cannot ignore it and must reject the application. The Court found fault with the Adjudicating Authority for noticing the Information Utility material but not addressing the statutory consequence of the "DISPUTED" status.

Conclusion: Since there was a record of dispute in the Information Utility, the Adjudicating Authority was obliged to reject the Section 9 application under Section 9(5)(ii)(d). Admission of the application was unsustainable on this ground alone.

Issue (ii): Whether a "notice of dispute" and surrounding facts established a pre-existing dispute requiring rejection under Section 9(5)(ii)(d)

Legal framework: The Court applied Section 9(5)(ii)(d) and evaluated whether a notice of dispute had been received by the operational creditor and whether the dispute was of a kind that barred insolvency admission.

Interpretation and reasoning: The operational creditor's own pleadings and emails showed that, upon receiving the corporate debtor's ledger on 27.10.2023, the operational creditor objected on 30.10.2023 to two ledger entries reflecting amounts adjusted/set-off towards a third party. This exchange demonstrated a live dispute regarding reconciliation of accounts and the propriety of set-off. The Court further held that the corporate debtor's reply to the demand notice dated 20.07.2024 constituted a notice of dispute within the meaning of the Code, as it denied liability and asserted an existing dispute based on earlier correspondence. The Court emphasized that the controversy-whether the set-off/adjustment was permissible and whether any "excess payment" was refundable-required adjudication on evidence and could not be determined in Section 9 summary proceedings.

Conclusion: The Court held that (a) the 20.07.2024 reply was a notice of dispute, and (b) the October 2023 correspondence evidenced a pre-existing dispute over ledger entries/set-off. Therefore, the Section 9 application also deserved rejection under Section 9(5)(ii)(d) on the "notice of dispute" ground, and the admission order was set aside and the application rejected.

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