Petition filed by Operational Debtor dismissed by NCLT on the contention of existing dispute raised by Corporate Debtor

SHAH PAPER MILLS LTD V. SHREE RAMA NEWSPRINT & PAPERS LTD
COMPANY APPEAL (AT) (INS.) NO. 1088 OF 2022
NATIONAL COMPANY LAW APPELLATE TRIBUNAL

HELD THAT

The petition filed by Operational Debtor has been dismissed by the NCLT on the contention of existing dispute raised by Corporate Debtor. The NCLAT revised the order passed by NCLT and allowed the petition since Corporate Debtor was trying to take advantage for non-payment of debt once admitted by it under shelter of provisions of Section 9.

SECTION 9 OF IBC, 2016 - APPLICATION FOR INITIATION OF CIRP BY OPERATIONAL CREDITOR

(1) After the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment under sub-section (1) of section 8, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under sub-section (2) of section 8, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process.

(2) The application under sub-section (1) shall be filed in such form and manner and accompanied with such fee as may be prescribed.

(3) The operational creditor shall, along with the application furnish—

(a) a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor.
(b) an affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt.
(c) a copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor; and
(d) such other information as may be specified.

(4) An operational creditor initiating a corporate insolvency resolution process under this section, may propose a resolution professional to act as an interim resolution professional.

(5) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), by an order—

(i) admit the application and communicate such decision to the operational creditor and the corporate debtor if, —

(a) the application made under sub-section (2) is complete.
(b) there is no repayment of the unpaid operational debt.
(c) the invoice or notice for payment to the corporate debtor has been delivered by the operational creditor.
(d) no notice of dispute has been received by the operational creditor or there is no record of dispute in the information utility; and
(e) there is no disciplinary proceeding pending against any resolution professional proposed under sub-section (4), if any.

(ii) reject the application and communicate such decision to the operational creditor and the corporate debtor, if—

(a) the application made under sub-section (2) is incomplete.
(b) there has been repayment of the unpaid operational debt.
(c) the creditor has not delivered the invoice or notice for payment to the corporate debtor; (d) notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility; or
(e) any disciplinary proceeding is pending against any proposed resolution professional:

Provided that Adjudicating Authority, shall before rejecting an application under subclause (a) of clause (ii) give a notice to the applicant to rectify the defect in his application within seven days of the date of receipt of such notice from the adjudicating Authority.

(6) The corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (5) of this section.

PRE-EXISTING DISPUTES

The Supreme Court noted the position laid down in Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd. that what has to be looked into is the existence or otherwise of a dispute and/or the suit or arbitration proceedings prior to the receipt of demand notice or invoice, as the case may be.

The Supreme Court reiterated the principle that in separating the grain from the chaff, the NCLT was not required to be satisfied that the defence is likely to succeed; it is enough that a dispute exists between the parties. There needs to be a plausible contention requiring investigation for adjudication. The correctness or truthfulness of such dispute (prior to the receipt of the demand notice) is a matter of evidence.

The Supreme Court took note of the following facts to conclude that there was a pre-existing dispute between the parties –

(a) correspondence between the parties regarding the dispute pertaining to the amount payable to the Appellant.
(b) the amount due to the Appellant not being reconciled; and
(c) the amount payable to the Appellant as included in the DRS in the BIFR proceedings not being formulated and finalised.

In view of the pre-existing dispute between the parties, the matter was not remanded to NCLT for reconsideration of the Section 9 Application.

BRIEF FACTS

The present was appeal filed by the Appellant against the order (‘the Impugned Order’ for short) passed by the Adjudicating Authority (National Company Law Tribunal, Ahmedabad, Division Bench Court-I).

By the Impugned Order, the Adjudicating Authority dismissed the CIRP application filed under Section 9 of the IBC by the Operational Creditor (the appellant herein) for initiation of Corporate Insolvency Resolution Process (‘CIRP’ in short) against the Corporate Debtor (the respondent herein)

DECISION

1. We have duly considered the arguments and submissions advanced by the Learned Counsel for both the parties and perused the records carefully.

2. The issue in the present case before our consideration is whether any operational debt above the threshold limit had become due and payable to the Operational Creditor and a default in payment thereof had arisen and whether any pre-existing dispute can be deciphered.

3. It is well settled that in Section9 proceeding of IBC, the Adjudicating Authority is not to enter into final adjudication with regard to existence of disputes between the parties regarding the operational debt but what has to be looked into is whether the defence raised by the Corporate Debtor is moonshine defence or not.

4. It has been noted by the Adjudicating Authority that there is no prior dispute regarding quality of goods or material supplied. What however has been held as dispute by the Adjudicating Authority is the difference of views on the actual amount payable by the Corporate Debtor to the Operational Creditor.

5. One reason for this difference to have cropped up is on account of express unwillingness on the part of the Corporate Debtor to clear the liability of outstanding debt for the period prior to change of management.

6. The other reason for the difference has been attributed by the Corporate Debtor to non- reconciliation of accounts. Since the Adjudicating Authority has come to the conclusion of a “serious dispute” between the Operational Creditor and Corporate Debtor on the quantum of operational debt due and payable by placing reliance on the reply of the Corporate Debtor to the Section 8 notice, after perusing the above reply, we find that the Adjudicating Authority has glossed over the fact that the Corporate Debtor has not controverted the outstanding liability which it had admitted on 15.04.2017.

7. Furthermore, claiming that no amount is due and payable to the Operational Creditor, we find that the Corporate Debtor has made this statement with the caveat that only invoices, post change in management, have been paid in full.
8. To our mind, this caveat needs to be examined to find out whether it supports the claims of there being a pre-existing dispute.

9. We are of the considered view that the stand taken by the Corporate Debtor in their reply to the Demand Notice that they are not liable for the claims of the Operational Creditor prior to change in management is not a tenable argument. Change in management is an internal matter of the Corporate Debtor in which the Operational Creditor had no role to play. Change in management of the Corporate Debtor cannot be a ground for extinguishing/wiping off the past liabilities that they owed to the Operational Creditor.

10. Therefore, it is not open for the Corporate Debtor to contend that they were not liable for the outstanding liability which had accruedduring the period of the previous management and hold this as a ground of dispute.

11. The untenability of this contention is reinforced by the fact that they had already categorically acknowledged and admitted their outstanding liability in their communication dated 15.04.2017. From the facts of the present case and the material on record, it also appears that the Corporate Debtor has tried to take advantage of their own wrong of being lackadaisical in reconciling the accounts in spite of nearly 30 requests made by the Operational Creditor to do so.

12. In the entire discussion by the Adjudicating Authority, we find that no notice has been taken in respect of repeated and multiple reminders sent by the Operational Creditor to the Corporate Debtor in this regard.

13. In the result, we are thus of the view that ground for rejection of the Application under Section 9 of IBC was erroneous.

14. Appeal is allowed.