2026 (2) TMI 740 - AT - IBC

Pre-existing dispute prevents summary admission under the insolvency code, requiring refusal of Section 9 applications.

Where a creditor's claim raises substantive contractual controversies, the admission-stage inquiry under the insolvency regime is limited to determining ... Pre-existing dispute u/s 5(6) of the Code - admission of CIRP application u/s 9(2) - completeness and absence of pre-existing dispute - liquidated damages not amenable to summary determination in CIRP admission proceedings - completion certificate issued subject to caveats does not preclude raising contractual disputes - Liquidated damages not amenable to summary determination in CIRP admission proceedings - HELD THAT:- It is the case of the Appellant that since no payment was received by the Appellant, the Appellant issued Demand Notice under Section 8 of the Code on 26.09.2020 which was replied by the Respondent on 08.10.2020 raising issue of imposition of liquidated damages due to alleged delay in completion of work and also raised issue regarding pre-existing disputes. Unsatisfied with the reply of the Respondent, the Appellant filed Section 9 Application before the Adjudicating Authority on 22.12.2020 which was rejected by the Adjudicating Authority vide its Impugned Order dated 24.04.2024. We note that the Adjudicating Authority has gone through the aspect of liquidated damages and concluded that the issue of liquidated damages cannot be dealt under summary trial under the Code. Since, the Adjudicating Authority has held that liquidated damages issue cannot be decided in summary proceedings which seems logical. We do not find any error in the Impugned Order on this issue. Pre-existing dispute under Section 5(6) of the Code - admission of CIRP application under Section 9(2) - completeness and absence of pre-existing dispute - HELD THAT:- The Respondent has been constantly raising issue regarding quality of work which tantamount to pre-existing disputes. It may also be kept in view that the Adjudicating Authority is conducting summary proceedings and is not expected to go in detailed scrutiny of evidence. The Adjudicating Authority should look into whether the dispute tantamount to be substantial, genuine and bona-fide and not spurious, speculative, illusory or misconceived. The Adjudicating Authority at the stage of admission of CIRP is not expected to hold a full trial in the matter and it must be decided whether the ground appears to be substantial. It is also a settled law that if such operational debt are bona-fide disputed on substantial ground, the Adjudicating Authority ought to dismiss the petition and such parties are required to seek other alternative legal recourse. Above clearly support the cause of the Respondent. The Impugned Order also draws full support from above judgement. We note that the Respondent has indeed sent as many as 89 emails raising several issues or defects, which clearly indicates pre-existing disputes. By no statute of imaginations, the Adjudicating Authority is expected to look into 89 said e-mail sent by the Respondent to the Appellant, before demand notice by received by the Respondent. Thus, we do not find any error in the Impugned Order on the issue regarding pre-existing dispute. Completion certificate issued subject to caveats does not preclude raising contractual disputes - Looking into the completion certificate, we are conscious of the fact that completion of project in time, along with requisite quality, is the heart of the contract management. It can be no one’s case that extra-ordinary delay which changes viability of the project can be simply brushed aside and should not be taken into consideration while deciding Section 9 application under the Code by the Adjudicating Authority. Simultaneously, we also need to acknowledge the fact that in commercial world, occasional delay may happen and may be attributable to both parties. We also need to factor into consideration, if finally, project was completed to satisfaction of the Corporate Debtor and whether the same was accepted by the Corporate Debtor without any caveats and qualification. In the instant appeal we note carefully that the Corporate Debtor issued the completion certificate with many caveats. In such background, the alleged completion certificate, cannot be treated as acceptance of work to satisfaction the Corporate Debtor, ignoring 89 emails sent by the Respondent to Appellant on pre-existing dispute prior to receipt of Demand Notice. Thus, the above mentioned completion certificate cannot be treated as without any caveat or clear certification the work, as claimed by the Appellant and therefore, do not support cause of the Appellant. We do not find any error in above finding by the Adjudicating Authority. Appeal is devoid of any merit and stand rejected. Issues: (i) Whether liquidated damages claim can be adjudicated in summary proceedings under the Code; (ii) Whether pre-existing disputes existed prior to the Section 8 demand notice and thereby barred admission of CIRP under Section 9; (iii) Whether the completion certificate issued by the corporate debtor amounted to an unqualified acceptance of work to the creditor's satisfaction.Issue (i): Whether liquidated damages claim can be determined in summary proceedings under the Insolvency and Bankruptcy Code, 2016.Analysis: The Tribunal considered the Adjudicating Authority's finding that veracity of deductions on account of liquidated damages involves detailed examination not amenable to the summary admission process under the Code. The Code contemplates summary disposal at the admission stage and does not require the Adjudicating Authority to decide complex contractual disputes on merits.Conclusion: The issue of liquidated damages cannot be decided in summary proceedings under the Code. Conclusion in favour of the Respondent.Issue (ii): Whether there were pre-existing disputes regarding the contractual work prior to the demand notice under Section 8 of the Code, sufficient to preclude admission of CIRP under Section 9.Analysis: The Tribunal examined the record of communications and the Adjudicating Authority's reliance on multiple communications predating the demand notice. The Tribunal applied the statutory framework distinguishing Section 7 and Section 9 regimes and the requirement that the Adjudicating Authority satisfy itself at the admission stage whether a bona fide pre-existing dispute exists without conducting a full trial.Conclusion: There existed pre-existing disputes prior to the Section 8 demand notice which were substantial for the purposes of admission under Section 9. Conclusion in favour of the Respondent.Issue (iii): Whether the completion certificate operated as an unconditional acceptance of work to the creditor's satisfaction thereby negating disputes.Analysis: The Tribunal noted the completion certificate contained express caveats, obligations to rectify defect liabilities and other qualifications. Considering the existence of prior communications raising defects and the conditional nature of the certificate, the certificate could not be treated as an unqualified acceptance resolving the disputes.Conclusion: The completion certificate, being subject to caveats and continuing defect liabilities, does not constitute an unqualified acceptance that negates the pre-existing disputes. Conclusion in favour of the Respondent.Final Conclusion: The Adjudicating Authority correctly held that (i) liquidated damages are not amenable to summary adjudication at the admission stage, (ii) bona fide pre-existing disputes existed prior to the demand notice, and (iii) the completion certificate was conditional; accordingly the Section 9 application could not be admitted and the appeal is dismissed.Ratio Decidendi: Where a creditor's claim involves substantive contractual disputes (including bona fide pre-existing disputes or contested liquidated damages) and the completion certification is conditional, the Adjudicating Authority at the Section 9 admission stage need only determine existence of such disputes and must refuse admission rather than adjudicate those disputes on merits.