Whether dispute raised by OC is bar for acceptance of petition under IBC

In this flash tabloid, the writer initiates by speak of the provisions of Insolvency & Bankruptcy Code, 2016 (hereafter referred as 'IBC') in relation to power of NCLT pursuant to admission of petition in case of dispute raised by the Operational Creditor.

The main drive of the broadsheet, on the other hand, is upon the 'Whether Corporate Debtor can bar the NCLT to accept the petition of Operational Creditor by raising a dispute on the Demand Notice'

Introduction:

Insolvency and Bankruptcy Code, 2016 (the, 'Code') is a crucial legislation passed by the Parliament which has the potential to be a game changer in the insolvency and bankruptcy regime in India.

As per Section 8(2)of the Code, he corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice mentioned in sub-section (1) bring to the notice of the operational creditor- (a) existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute;

CASE ELEMENT:

A. Factual Background:

1. M/s Anil steels who is the petitioner/operational creditor filed this petition under sections 8 and 9 of the Insolvency and Bankruptcy Code, 2016 (in short I&BC, 2016) read with Rule 6 (1) of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 for initiating insolvency resolution process as against the respondent/corporate debtor A.D Electro Steel Company Pvt. Ltd.

2. Petitioner.......... As per the purchase orders dated 29.10.2015, 21.12.2015 and 25.2.2016 for the purchase of Buffer Plunger Casting and Buffer Casting, supplied the same to the corporate debtor which would be valued for an amount of Rs. 56,94,977.00. .

3. Petitioner.......... The corporate debtor made payment of Rs. 4,44,782/- against the invoice no. M-50 and after that made lumpsum payments of Rs. 10,00,000/-, Rs. 5,00,000/-, Rs. 13,00,000/- and a cheque bearing No. 016246 dated 10.05.2016 for Rs. 20,00,000/- drawn on Bank of India. .

4. Petitioner.......... The said cheque was presented for clearing but was returned unpaid with an endorsement "Exceeds Arrangements". Petitioner served a legal notice dated 15.06.2016 under section 138 of the Negotiable Instrument Act, to the corporate debtor. The corporate debtor failed to pay the amount pertaining to the said dishonoured cheque. Petitioner filed a complaint before the Metropolitan Magistrate, Kanpur against the corporate debtor for realisation of the amount on the basis of dishonour of cheque.

5. Petitioner..........Inspite of repeated reminders sent to the Respondent Company no payments were made to the Applicant. At no stage Respondent disputed the amounts due and payable by the Applicant. The Board of Directors of the Respondent Company by a Resolution dated 3.6.2016 resolved that Respondent is one of the Guarantors in respect of the Working Capital Facility of Rs. 1299 Crores availed by Bhatia Global Trading Ltd., Respondent Company executed Revival Letters 20th December, 2013, and 25.8.2016 acknowledging liability to the lenders and other secured parties.

6. Petitioner.......... Operational creditor issued demand notice in Form-3 under section 8(1) of the I&BC, 2016 demanding an amount of Rs. 25,36,087/-. In reply to the demand notice the corporate debtor raised untenable contentions and raised unlawful claims against the operational creditor.

Objections by Respondent:

7. Respondent............ The operational creditor failed to produce English translations of the documents annexed to the petition.

8. Respondent.......... The contents narrated by the operational creditor in the petition is incomplete and therefore the petition is not maintainable

9. Respondent.......... the respondent raised a dispute regarding the liability to make payment to the petitioner even prior to receipt of demand notice this Hon'ble Tribunal shall reject the petition

10. Respondent.......... As per the terms of the purchase orders issued to the operational creditor the petitioner should have supplied the goods with Test Certificates and Guarantee Certificates of which the petitioner failed to comply and therefore there is breach of contract on the side of the petitioner. The petitioner failed to supply goods as per the specifications in the purchase orders issued by the respondent and therefore the respondent is not liable to pay the amount as demanded by the petitioner.

11. Respondent.......... The letter issued by the respondent through its advocates dated 28.06.2016 as well as letter dated 09.06.2016 raising disputes purposely did not produce by the petitioner before this Tribunal amounts to suppression of material facts. The contentions raised by the petitioner in the petition which are not admitted in the reply affidavit filed by the respondent or denied by the respondent. Upon the above said contentions, the respondent prays for rejecting the application under section 9(5)(ii).

B. Findings of the NCLT Bench:

• Before going into the question it is significant to note here that the contentions raised against the non-production of English translation of certain documents and that some of the documents produced were not readable for want of legible copies are not sustainable at this juncture because petitioner as directed produced legible copies and English translation of the documents in Hindi.

• On a reading of the purchase orders and the invoices issued by the petitioner to the respondent it is understood that though there is some dissimilarity in regards description of items supplied to the respondent it has come out in evidence that the respondent received the goods without any protest. So also it has come out in evidence that cheque has been issued in terms of the invoices issued by the petitioner by accepting the goods received by the respondent.

• Admittedly on 10.05.2016 a cheque has been issued by the respondent to the petitioner for an amount of Rs. 20 lakhs and one another cheque for Rs. 4,50,195/-. Both cheques were presented for realisation of money to the bank. Both cheques were returned unpaid. This prompt the petitioner to issue notice under section 138 of the Negotiable Instruments Act (Annexure II-L) on 15.06.2016. It is pertinent to note hear that on 3.03.2016 petitioner issued a letter to the respondent reminding him as to non-payment of balance outstanding in the name of the petitioner from the respondent (Annexure-II-F at P. 058) In reply to that letter dated 18.03.2016 respondent expressed it's inability to pay the balance amount. It is good to read the relevant portion of the reply. It read as follows:-

• "Owing to financial year ending, we are not getting our payment from our valued customers. This resulted in delay in your payment.

• We are expecting to start receiving of payment from our client in April, 16 and we shall also clear your dues by April, 2016."

• A reading of the above referred letter itself is self- explanatory. At an undisputed time, the respondent did not raise any challenge against the quality of goods or service. The respondent received the goods, accepted the goods without any protest and tendered payment by way of cheque. The above said conduct of the respondent shows that the dispute raised after service of notice under S.138 of Negotiable Instruments Act was raise with an ulterior motive.

• Upon the above said discussions we are of a considered view is that the respondent raised the dispute in the instant case is for the sake of objection to see that petition of this nature is to be rejected. No doubts the dispute raised by the respondent does not comes under the purview of Section 5(6) of Insolvency & Bankruptcy Code, 2016. Therefore, we hold that the objections.

In view of the above said discussions this petition for initiating insolvency resolution process is hereby admitted. Moratorium in terms of section 14 of the Code comes into effect. The interim resolution professional is directed to take necessary steps as per sections 15, 17 and 18 and file his report within the statutory period.

This petition is admitted under the code.

Conclusion: On the basis of above decided case law it can be opine that 'Insolvency resolution process IS to be admitted IF disputes raised in reply notice ARE UNSUSTAINABLE.'