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 entries pre-dated the Section 8 demand and supported a plausible, non feeble defence; therefore the reply to the demand notice constituted a valid notice of dispute. Applying the admission-stage test in Section 9(5)(ii)(d) - whether a prima facie plausible dispute exists requiring further investigation - the adjudicating authority should have rejected the Section 9 application, making the CIRP initiation and appointment of the IRP unsustainable.

---

---

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.

---