TaxTMI 
TaxTMI 
2026 (7) TMI 101
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....he said impugned order, the Adjudicating Authority has allowed the application filed under Section 9 of the IBC by the Operational Creditor-Respondent No. 1- M/s Sree UGCL Projects Limited seeking initiation of Corporate Insolvency Resolution Process ("CIRP" in short) against the Corporate Debtor- M/s Geosphere Industries Pvt Ltd. Aggrieved by the impugned order, the present appeal has been preferred by the Appellant-Corporate Debtor. 2. Coming to the factual matrix of the present case, the salient facts, events and developments relevant to be noticed are that the Corporate Debtor-M/s Geosphere Industries Pvt Ltd which was earlier known as Godawari Natural Resources Limited was engaged in mining and mineral processing activities and had been awarded certain mining and crushing-related works by Jayaswal Neco Industries Limited. In turn, the Corporate Debtor had engaged the Operational Creditor vide letter of engagement dated 14.03.2019 and issued them a Work Order on 23.03.2019 which was subsequently amended on 14.11.2019 and 26.12.2019. In terms of Clause 11 of the General Terms and Conditions of the Work Order, invoices were to be raised by the Operational Creditor upon complet....
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....was not acceptable. It was also added that the ledger dated 03.03.2021 was the only agreed ledger between the two parties wherein the Corporate Debtor had acknowledged their liability towards the Operational Creditor arising out of the seven invoices raised by them and that this ledger records the TDS deposited by the Corporate Debtor on these invoices. Another relevant fact to be noticed is that on 15.06.2023, on the request of the Operational Creditor, the Corporate Debtor had purportedly issued a Work Completion Certificate, which certificate was purportedly required for the purposes of income tax compliance by the Operational Creditor. 4. The Operational Creditor issued a Demand Notice dated 19.09.2024 under Section 8 of the IBC upon the Corporate Debtor claiming an amount of Rs. 18,56,78,817/- including interest. The demand notice was duly replied to by the Corporate Debtor on 11.10.2024 in which not only was the liability disputed but the issue of pre-existing disputes raised. However, the Adjudicating Authority after due consideration admitted the Section 9 application on 17.10.2025. 5. Aggrieved by the impugned order, the present appeal has been preferred by the Appel....
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....ended that the Adjudicating Authority failed to appreciate that the existence of the credit note in itself establishes a plausible contention that a dispute under Section 8 of IBC exists which was sufficient to defeat the maintainability of a Section 9 petition. It was also grossly wrong on the part of the Adjudicating Authority in treating the absence of arbitral or civil proceedings as conclusive proof of absence of dispute, despite the statutory scheme not requiring pre-existing proceedings to establish a pre-existing dispute. When the default was disputed and the operational debt was not admitted by the Appellant, the Section 9 petition ought to have been rejected. The Adjudicating Authority had clearly failed to notice that the conditions precedent for admission under Section 9 were not satisfied in the present case. It was also added that it was misconceived on the part of the Adjudicating Authority to treat the Work Completion Certificate as an unconditional acknowledgement of liability by them in disregard of the fact that the same was issued on the specific request of the Operational Creditor exclusively for income tax purposes and not for an acknowledgement of satisfactor....
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....he Corporate Debtor but not ever shared or reconciled with the Operational Creditor prior to the issue of Section 8 demand notice or the filing of Section 9 petition. In fact, these unilateral entries were placed for the first time before the Adjudicating Authority. 11. Moreover, there was a clear inconsistency between the draft MOU which had proposed the issue of a credit note for Rs. 9.49 Cr. and the credit note which was reflected in the ledger subsequently which was for a higher amount of Rs. 10.60 Cr. This discrepancy in amounts exposes that the credit note was only an afterthought and a fabrication. It was contended that the credit note was fabricated and was never issued by the Operational Creditor as it had originated from an email id which was not used by the Operational Creditor When the credit note had been issued from an unknown email id which was not the e-mail address from which communications were exchanged by the Operational Creditor, it casts doubt on the validity of the credit note and hence was rightly ignored by the Adjudicating Authority. Submission was further pressed that CA certificate itself was an unequivocal admission and acknowledgement of the debt th....
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....unpaid operational debt in relation to such dispute?" From a plain reading of the above judgment, it is clear that if any of the aforesaid conditions of debt above the threshold limit being due and payable remains unpaid but is found to be disputed, the Section 9 application would have to be rejected. 15. We would like to further draw upon the other legal precepts laid down in this judgement that as long as a dispute is raised which is not a patently feeble argument or unsupported by evidence, the Adjudicating Authority has to reject the Section 9 application. If we apply the above tests laid down in Mobilox judgement then what has to be looked into is whether the defence raises a dispute which needs further adjudication by a competent court or if there is an undisputed debt for which insolvency can be initiated against the Corporate Debtor. The relevant extracts of the judgment is as reproduced as below: "51. It is clear, therefore, that once the operational creditor has filed an application, which is otherwise complete, the adjudicating authority must reject the application under Section 9(5)(i)(d) if notice of dispute has been received by the operational creditor ....
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....a quick glance at the statutory provisions of IBC. Section 8 of the IBC envisages that the Operational Creditor, on occurrence of a default by the Corporate Debtor, is required to deliver a Demand Notice in respect of the outstanding Operational Debt. Section 8(2) lays down that the Corporate Debtor within a period of 10 days of the receipt of the Demand Notice would have to bring to the notice of the Operational Creditor, the existence of dispute, if any. Post issue of demand notice by the Operational Creditor, in terms of Section 9(1), if the Operational Creditor does not receive payment from the Corporate Debtor or does not receive notice of dispute under Section 8(2), he may file an application under Section 9(1) while Section 9(5)(ii) of the IBC contemplates rejection of Section 9 application in certain circumstances while Section 9(5)(ii)(d) contemplates rejection when notice of dispute has been received by the Operational Creditor or there is a record of dispute in the information utility. 17. Having noted the propositions of law laid down in the Mobilox judgement with regard to test that has to be applied in a Section 9 matter and also noted the statutory contours of Sec....
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....by the Corporate Debtor. 9.6. In the present matter, while the Corporate Debtor raised letters of protest, it simultaneously continued to avail services, issued completion certificates, and acknowledged liability in its ledger. The cited judgments are therefore distinguishable and do not aid the Corporate Debtor." 19. To begin our analysis of the facts at hand, we first come to the performance related disputes which were brought to the notice of the Operational Creditor by the Appellant. It is the case of the Appellant that seven contemporaneous performance-related letters had been exchanged by them with the Operational Creditor between August 2019 and March 2020 regarding excess generation of fines; failure to maintain prescribed size specifications; ineffective pre-screening systems; reduced output and substantial losses suffered by the Corporate Debtor. These communications besides highlighting performance deficiencies had also concurrently carried a warning that penalties would be imposed on account of losses caused to the Corporate Debtor. All the disputes raised therein clearly preceded the issue of the Section 8 Demand Notice and undoubtedly fell in the category ....
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....se in plant. Kindly note that because of quality and quantity issues, our client M/s Jayaswal Neco Industries Ltd, are unable to use the material and has strictly warned us that if the quality is not improved immediately, penalty will be imposed on us on account of production loss at their plant due to quality issue said above. Again, you are requested to look into the matter seriously and improve the working immediately. Date: 24.07.2020 To M/s. United Global Corporation Ltd Ref: Work Order no GNRL/Mines/2019/002, dated 23.03.19 and our Letters dated 19.08.2019, 25.11.2019, 26.12.2019, 11.01.2020, 29.01.2020, 18.02.2020 & 13.03.2020 Sub: Levy of Penalty/Claim This has reference to above subjected work order and various letters issued to you raising therein our serious concern regarding non fulfilment of work obligation as per the scope and terms and conditions of the said work order by you. In spite of our rigorous follow ups for improvement in working neither quality improved with respect to undersizing/fines generation nor pre-screening effectiveness increased. Rather one more phenomena wit....
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....the same had specifically provided that in case of deficient performance or failure to meet work specifications, the Corporate Debtor would have the right to impose penalties on the Operational Creditor which factum has not been denied by the Operational Creditor either. The Respondent while admitting that the Corporate Debtor had the right to levy the penalty but claimed that since the Corporate Debtor had never imposed any penalty, these performance deficiency letters cannot be looked upon as characterising pre-existing dispute. We are not persuaded to accept this contention of the Operational Creditor since when we look at the communications it is amply clear that work-related disputes and business loss suffered by the Corporate Debtor has been raised in all of them and in the letter dated 24.07.2020 the Corporate Debtor had proposed imposition of a penalty of Rs. 11.38 Cr on 24.07.2020. Notwithstanding the fact that the Corporate Debtor had sought the consent of the Operational Creditor which had allegedly never been given, it does not detract from the fact that these letters clearly signified that contemporaneous disputes had been raised which were clearly prior to the Section....
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....d view that after having been the progenitor of the MOU it does not lie in the mouth of the Operational Creditor to resile from the contents of the MOU. Further when we see the draft MOU as placed on record, we do not find any mention captioned therein that the MOU had been shared with the Corporate Debtor on 'without-prejudice' basis. 27. At this stage, we would like to reproduce some of the relevant extracts of the terms of the said MOU which was to the effect: "1. Both the parties agree to resolve the ongoing business dispute relating to quality of material which has been raised and pointed out on timely basis by the Second Party to First Party. 2. The parties expressly acknowledge that this agreement is being made as a compromise and settlement of disputed issues, that the execution and compliance with this agreement is not be constructed to be an admission by any party, of any liability or obligation, to any other party or any liability or other obligation by any party to any third party. ... 4. The parties agree that they are entering into this agreement as a compromise of disputed claims, to avoid the cost and expense of further litigat....
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....is the contention of the Corporate Debtor that pursuant to the execution of an MOU between the two parties on 20.12.2020, the Operational Creditor had issued a credit note on 30.01.2023 for Rs. 10.60 Cr to the Corporate Debtor. It was further asserted that with the issue of credit notes, corresponding write-off entries were also reflected by the Corporate Debtor in the ledger account on 21.02.2023. Submission has been pressed that the Adjudicating Authority had on the one hand acknowledged that there is a credit note dated 31.01.2023 but inter alia questioned its veracity and authenticity on the ground that the credit note was irregular in format and inconsistent with the standard template of the Operational Creditor. Further, the Adjudicating Authority has gone alongwith the misleading plea of the Operational Creditor that the credit note had originated from an email id which was not that of the Operational Creditor but failed to take cognisance of the fact that the same email conveying the credit note had been endorsed to one Mr. Vamsi, who was the Managing Director of Operational Creditor who at no point of time prior to initiation of Section 9 proceedings raised any contemporan....
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.... Authority had returned the correct finding that the Appellant-Corporate Debtor having issued Work Completion Certificates in 2020 coupled with the fact that the Corporate Debtor had also signed a ledger in 2021 reflecting outstanding dues payable to the Operational Creditor, this was a case of established debt and default where the debt was not a disputed one and hence a fit case for admission of Section 9 petition. Further, the Corporate Debtor had made a subsequent payment of Rs. 20 lakhs to the Operational Creditor on 03.11.2020. Further when payments were made by the Corporate Debtor to the tune of Rs 20 lakhs to the Operational Creditor even after raising the alleged dispute, this clearly negates the continued presence of the alleged pre-existing disputes. It was also pointed out that the Corporate Debtor has put on record another ledger with entries post 03.03.2021 which were unilateral entries made by them. As these unilateral entries had never been shared or reconciled by the Corporate Debtor with the Operational Creditor prior to the issue of Section 8 demand notice or the filing of Section 9 petition but was placed by them in their reply to the Section 9 petition before ....
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....porate Debtor had inter-alia adequately highlighted the events leading to the Work Completion Certificate which are as reproduced below: "1. At the outset, all the contentions and allegations in relation to your alleged total amount of debt of Rs. 18,56,78,817/- (Rupees Eighteen-crore Fifty-six lakh Seventy-eight thousand Eight-hundred Seventeen Only) including the aforesaid alleged debt itself as made out in your Legal Notice under reply are disputed, challenged and denied in totality, being erroneous, baseless and devoid of any merit. Further, the monetary demand for the purported unpaid outstanding dues to the tune of Rs. 18,56,78,817/- (Rupees Eighteen-crore Fifty-six lakh Seventy-eight thousand Eight-hundred Seventeen Only) comprising of the Principal Amount of Rs. 10,60,39,021/-(Rupees Ten-crore Sixty-lakh Thirty-nine Thousand Twenty-one Only), along with interest to the tune of Rs. 7,96,39,796/- (Rupees Seven-crore Ninety-six lakh Thirty-nine thousand Seven-hundred Ninety-six Only) allegedly due as on 20.05.2024, are specifically disputed, challenged and denied being baseless and devoid of any merit and contrary to documents executed and exchanged between you and my....
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....l matrix we find that the Adjudicating Authority has wrongly ventured to enter into final adjudication with regard to existence of dispute between the parties regarding operational debt which cannot be sustained. Looking to the materials on record including the notice of dispute, we are of the view that the disputes raised by the Respondent were a plausible contention and cannot be said to be spurious dispute. Section 9 proceedings are not there to resolve such contractual disputes and such disputes are required to be determined in appropriate civil proceedings. 38. With the aforesaid discussion, we are of the considered view that the Adjudicating Authority has erroneously admitted the application under Section 9 of the IBC. We therefore set aside the impugned order. The orders passed by the Adjudicating Authority initiating CIRP against the Corporate Debtor 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 Appeal is allowed with the aforesaid observations. No order as to costs. ============= Documen....