Unreturned construction materials dispute found pre-existing; insolvency petition dismissed as dispute rendered invoices non-admitted.

Pre-existing dispute over poor-quality shuttering and scaffolding, pending reconciliation and requests for valuation, was found to render disputed invoices non-admitted and thus not actionable as operational debt under the insolvency code. The tribunal applied the Mobilox principles to hold that a plausible, substantiated pre-existing dispute raised before the demand notice bars initiation of insolvency proceedings; the adjudicating authority therefore rightly rejected the insolvency application and the appeal was dismissed.

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Issues: Whether pre-existing disputes existed between the parties regarding the goods supplied and the crystallisation/amount of the operational debt, such that the Section 9 application for initiation of CIRP was rightly rejected under the Insolvency and Bankruptcy Code, 2016.

Analysis: Applicable law requires that for a Section 9 application to succeed the operational debt must be due and payable and not subject to a pre-existing dispute. The Mobilox test requires the adjudicating authority to examine documentary evidence to decide (i) existence of operational debt, (ii) whether documentary evidence shows the debt is due and payable, and (iii) whether a dispute or record of a suit/arbitration existed prior to the demand notice. Communications exchanged before the demand notice showing disagreements on quality of supplied material, requests to collect/assess damaged material, and demands for reconciliation are relevant to determine a pre-existing dispute. A challenge to interest claimed (where interest was not agreed in the principal hiring orders) and a disputed claim for value of unreturned goods constitute plausible grounds of dispute which need not be finally adjudicated by the Adjudicating Authority at the Section 9 stage.

Conclusion: Issue decided in favour of the Respondent. The disputes raised prior to the Section 8 demand notice were found to be real and plausible; therefore the Section 9 application was rightly rejected on the ground of pre-existing dispute.

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