2026 (2) TMI 564 - AT - IBC

Pre-existing dispute under Insolvency and Bankruptcy Code found; Section 9 petition should have been rejected and CIRP vacated

A pre-existing dispute under Sections 8 and 9 of the Insolvency and Bankruptcy Code was found where contemporaneous communications, debit notes and ledger ... Pre-existing dispute - Operational Creditor - notice of dispute u/s 8 and Section 9(5)(ii)(d) of the Insolvency and Bankruptcy Code, 2016 - Mobilox test - plausible contention requiring further investigation - spurious defence - admission of Section 9 application and initiation of CIRP - agency and effect of notice to agent on the principal - Whether there was any pre-existing dispute between the parties within the meaning of Sections 8 and 9 of the IBC - HELD THAT:- Keeping in view the industry practice of employing agents was being followed by both the Corporate Debtor and the Operational Creditor, the communications relating to supply of contaminated goods exchanged between the agents and their principals and consequential issue of debit-notes which all happened prior to issue of Section 8 Demand Notice did constitute critical communications showing pre-existing disputes but these communications have not been dealt by the Adjudicating Authority in the impugned order. It is also a well settled legal proposition that for pre-existing dispute to be a valid ground to nullify an application under Section 9, the dispute raised must be truly existing at the time of filing a reply to the notice of demand as contemplated by Section 8(2) of IBC or at the time of filing the Section 9 application. In the present case, we notice that reply was furnished on 01.07.2019 by the Corporate Debtor in response to the Section 8 Demand Notice dated 20.06.2019. Section 9(5)(ii)(d) of IBC expressly provides that Adjudicating Authority shall reject the Section 9 application if notice of dispute has been received by the Operational Creditor. The above reply to demand notice is clearly a notice of dispute within the meaning of Section 9(5)(ii)(d). The Adjudicating Authority has failed to appreciate the facts of the case in its entirety having not examined the due applicability of Section 9(5)(ii)(d) to the facts of the present case and instead proceeded to observe that defence of pre- existing dispute raised by the Corporate Debtor is a spurious defence. It is clear that the defence which was raised by the Corporate Debtor in its reply to Demand Notice as well as in their detailed reply filed in Section 9 application cannot be said to be unsupported by evidence. The defence raised by the Corporate Debtor is prima facie plausible and cannot be outrightly rejected as spurious, hypothetical or illusory. We are satisfied that the Section 9 application filed by the Operational Creditor did not deserve admission and was liable to be rejected as required by Section 9(5)(ii)(d) of the IBC. The Adjudicating Authority committed an error in admitting the Section 9 application and we, therefore, hold that the impugned order passed is unsustainable. In result, we are of the considered view that the Adjudicating Authority has erroneously admitted the application under Section 9 of the IBC. We allow the Appeal and set aside the impugned order. The orders passed by the Adjudicating Authority initiating CIRP against the Corporate Debtor and appointing Interim Resolution Professional and all other orders pursuant to impugned order are set aside. The Corporate Debtor company is released from the rigours of CIRP and is allowed to function independently through its board of directors with immediate effect. The amount of Rs. 2 lakh directed by the Adjudicating Authority to be paid by the Operational Creditor to the Resolution Professional, if not yet paid, be paid within two weeks from the date of this order. We however add that the Appellant can pursue its remedies before an appropriate forum of law. We also observe that it will remain open for the Intervenor- SBI to exercise its liberty to initiate proceedings against the Corporate Debtor under the statutory provisions of IBC. As stand closed. Issues: (i) Whether a pre-existing dispute within the meaning of Sections 8 and 9 of the Insolvency and Bankruptcy Code, 2016 existed between the parties such that the Section 9 application should have been rejected; and (ii) Whether the Adjudicating Authority committed error in admitting the Section 9 application and initiating CIRP against the Corporate Debtor.Analysis: The material on record before admission included contemporaneous communications and a debit note dated 25.10.2017 issued by the end-user Yashwant Glucose Karkhana to the Corporate Debtor, a subsequent debit note dated 31.03.2018 from the Corporate Debtor to the Operational Creditor reflected in ledgers and in the Corporate Debtor's income tax returns filed before issuance of the Section 8 demand notice, and other pre-demand communications describing cattle deaths and contamination. The statutory test under Section 9(5)(ii)(d) of the Insolvency and Bankruptcy Code, 2016 requires the adjudicating authority at the admission stage to determine only whether a plausible dispute exists that is not a patently feeble or spurious defence and which requires further investigation; the authority is not to decide on the merits. The reply to the Section 8 demand notice dated 01.07.2019 set out denial of liability, assertion of losses, and reference to the debit notes and related communications, thereby constituting a notice of dispute within Section 9(5)(ii)(d). The payments made in respect of a separate purchase order did not negate the existence of a dispute relating to the disputed purchase order which was independently disputed and stopped mid-supply.Conclusion: (i) A pre-existing dispute existed within the meaning of Sections 8 and 9 of the Insolvency and Bankruptcy Code, 2016, as the dispute was supported by plausible documentary evidence and communications preceding the Section 8 demand notice.Conclusion: (ii) The Adjudicating Authority erred in admitting the Section 9 application; the Section 9 application ought to have been rejected under Section 9(5)(ii)(d) of the Insolvency and Bankruptcy Code, 2016 and the orders initiating CIRP and appointing the Interim Resolution Professional were unsustainable.Ratio Decidendi: Where the operational creditor's application under Section 9 is met by a notice of dispute supported by contemporaneous documents or other prima facie evidence showing a plausible dispute that is not patently feeble or illusory, the adjudicating authority must reject the Section 9 application under Section 9(5)(ii)(d) of the Insolvency and Bankruptcy Code, 2016.