2026 (2) TMI 437 - AT - IBC

Whether unpaid contractual instalment constitutes operational debt under insolvency law; appeal dismissed and adjudicating authority decision affirmed

Pre-existing dispute over whether non-payment of a contractual instalment constitutes an operational debt under the insolvency code was analysed by ... Pre-existing dispute - operational debt - Section 9 IBC - plain reading of the contract - construction of contract - Mobilox test - HELD THAT:- There is no dispute that the contract required the appellant to set aside 2 days within two years ending 07.03.2023 for rendering services, which in terms of Clause 3.2 of the contract, must be at the date, time and place and schedules to be mutually agreed to by the parties in writing. The appellant was paid 50% of the sum agreed to be paid as consideration for two days as signing amount as provided in Clause 5.1.1, and his services too have been procured for a day. Admittedly, the second day services were not procured, but the appellant has made his claim for the second instalment in terms of Clause 5.2. The point is whether non-payment of the amount stipulated to be paid under clause 5.1.2 gives rise to an operational debt, or does it merely give rise to a cause of action for claiming damages for breach of contract. Since the parties are at variance on this issue, and inasmuch as the respondent has raised a dispute over it, it now becomes imperative to ascertain what the plain reading of the contract supports. It is underscored that our effort is to identify if a plausible dispute exists in understanding the terms of the contract and not how we harmonise internal inconsistences, if any. It made clear that that if the issue eventually boils down to one involving breach of contract on the part of the respondent entitling the appellant to a claim for damages, then in terms of Sec. 3(6) of the Code, the appellant would be entitled to make a claim, but a mere right to claim damages will not still constitute any debt within the meaning of an operational debt as defined under Sec. 5(21). While a claim may include a debt, not every claim will constitute a debt for commencing a CIRP. As outlined earlier, there will be a need to travel thus far to enter a finding on it only if we find that the plain reading of the contract leads to a conclusion that the defence resting on a pre-existing dispute is fanciful and sham. While Clause 7.2(c) provides that the appellant has a right to make a claim for the entire consideration where the respondent wholly defaults in performing its part of the contract, clause 7.2(d) provides for forfeiture of the signing amount which is the first instalment of the consideration paid under Clause 5.1.1 in the eventuality of the respondent defaults in fulfilling its contractual obligations. Cautioning ourselves not to embark on an enquiry on the effect of these contractual terms in terms of the principles of Contract Act, we still believe that consideration payable cannot be separated from the purpose for which it was agreed to be paid. To sum up while the appellant’s understanding of the contract seems to suggest that he has to provide one service – of endorsing the respondent’s Website. The consideration payable is one consolidated sum receiving which the appellant has undertaken to perform one service, which in terms of the contract is required to be made for not more than two days. The second day in that sense, may have to be understood as a cushion to meet the contingency when the contracted services could not be fully performed on the first day. However, nowhere in the contract we find any indication that the consideration as agreed upon represents a consolidated sum for one service to be rendered for not more than two days. On the other hand, the terms of the contract make the understanding of the contract as projected by the respondent a possibility. This would mean that the pre-existing dispute which the respondent has raised appears reasonably plausible. Eventually this has to be sorted out by a civil court and not by us. To conclude, we affirm the judgement of the Adjudicating Authority in C.P. (IB) and consequently dismiss the present appeal. Issues: Whether a plausible pre-existing dispute exists between the parties regarding the contractual obligation to pay the second instalment under the Endorsement Agreement such that initiation of Corporate Insolvency Resolution Process under Section 9 of the Insolvency and Bankruptcy Code, 2016 is barred.Analysis: The analysis applies the legal framework that (i) initiation of CIRP under Section 9 requires existence of an undisputed debt and default, (ii) a pre-existing dispute raised by the corporate debtor must be plausible and not a sha m/fanciful defence, and (iii) the Adjudicating Authority may examine written contract terms to the extent necessary to determine plausibility but must not engage in full contract construction as a civil court. The contract was examined by plain reading of Recital D, Clause 3.2 and Clauses 5, 5.1.1 and 5.1.2 to determine whether the second instalment constituted an unconditional payment obligation or payment contingent on utilisation/performance of the second day. Clauses 7.2(c) and 7.2(d) were considered concerning consequences of default, but the payment obligation was found to be integrally connected to the services to be rendered and susceptible to more than one plausible interpretation. Given these textual ambiguities and the respondent's contention that payment of the second instalment depended on performance/availability for the second day, the dispute over whether the amount claimed is an operational debt or a claim for damages is reasonably plausible and was raised prior to the demand notice. Under the applicable standards for Section 9 proceedings, such a plausible pre-existing dispute prevents commencement of CIRP.Conclusion: The pre-existing dispute regarding the contractual construction of the payment obligation for the second instalment is plausible; therefore initiation of CIRP under Section 9 of the Insolvency and Bankruptcy Code, 2016 is barred and the adjudicating authority's dismissal of the Section 9 petition is affirmed.