Initiation Of Arbitration Proceedings Before Issuance Of Demand Notice Is Sufficient To Reject Application U/S 9 Of IBC: NCLAT

Brief Facts

The appellant filed this appeal against an order passed by the NCLT by which an application under section 9 of the code was dismissed.

Contentions:

The appellant submitted that despite novation of the work contract, the HS issued a letter seeking demobilisation from the site and stopped making payments. It was further contended that after adjustments the corporate debtor owed certain amount towards to operational creditor as per RA bills.

It was also argued that the ledger statement of the Appellant clearly shows that ad-hoc payments to the tune of Rs. 6.24 cr. had been made by the Corporate Debtor against the RA Bills raised by them which substantiates acknowledgement of debt liability on the part of the Corporate Debtor. A demand notice was issued by the appellant under section 8 of the code which was not replied to by the corporate debtor within 10 days as stipulated under the code. However, a belated reply was sent without making any payments. It was also argued that arbitration notice evidencing a pre existing dispute was issued by the HS to the appellant and not by the corporate debtor and additionally no endorsement of it was sent to the CD.

When the Corporate Debtor was not a party to the arbitration notice, the notice cannot be held to be a ground for pre-existing dispute between Operational Creditor and Corporate Debtor and that a dispute under Section 5(6) of the IBC has to be between the Corporate Debtor and the Operational Creditor.

Lastly, it was contended that there was a novation of the original contract contained in the original work order. Therefore, on the novation of the contract, the arbitration notice issued by H&S cannot be treated as an arbitration notice issued by the Corporate Debtor. It was mentioned that since the rights, titles of H&S under the original work order stood transferred to the Corporate Debtor, H&S had no right to invoke arbitration as there was no privity of contract existing any longer between them and the Appellant.

Refuting the submissions, the respondent argued that the contention of the Operational Creditor that there was novation of contact is misplaced because the conditions precedent for novation of contract were not fulfilled.

It was also argued that the Corporate Debtor on receipt of the demand notice had in their reply clearly and specifically stated that these bills were not signed by the Operational Creditor nor verified by the billing team of H&S and the Corporate Debtor and hence been based on fraud and fabricated document.

It was also submitted that in the absence of existence of any tax invoice with the notice of demand, it cannot be said that there was any default on the part of the Corporate Debtor.

It was further contended that there is a clear admission on the part of the operational creditor as the events that transpired clearly indicated that they were aware of the invocation of arbitration notice in relation to original work order by the HS.. Since the Section 8 Demand Notice was issued on 23.02.2023, it was clearly subsequent to the notice of invocation of arbitration of 19.01.2023 and that in the wake of such pre-existing disputes as raised in the arbitral proceedings, the Adjudicating Authority had not committed any error in rejecting the Section 9 application.

Observations:

The tribunal observed that Section 8 of the IBC requires the Operational Creditor, on occurrence of a default by the Corporate Debtor, 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.

It added that after issue of demand notice by the Operational Creditor, if the Operational Creditor does not receive payment from the Corporate Debtor or notice of the dispute under Section 8(2), he may file an Application under Section 9(1) of IBC.

It further observed that It is also a well settled proposition of law that for a pre-existing dispute to be a ground to nullify an application under Section 9, the dispute raised must be truly existing at the time of filing a reply to notice of demand as contemplated by Section 8(2) of IBC or at the time of filing the Section 9 application.

The tribunal observed that the corporate debtor raised a pre-existing dispute in the reply sent in pursuance of the demand notice issued by the operational creditor on the ground that arbitration notice was issued prior to issuance of demand notice by operational creditor which evidences a clear cut case of a pre-existing dispute.

In Mobilox Innovations Pvt. Ltd. vs. Kirusa Software Pvt. Ltd., 2017 the Supreme Court while laying test for determining pre-existing dispute held that “such notice must bring to the notice of the operational creditor the “existence” of a dispute or the fact that a suit or arbitration proceeding relating to a dispute is pending between the parties. Therefore, all that the adjudicating authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the “dispute” is not a patently feeble legal argument or an assertion of fact unsupported by evidence.”

While the applying the above ratio to the facts of the present case, it opined that “the pre-existing dispute must relate to the transaction or debt that forms the basis of the Section 9 application. Clearly the debt in this case arises out of RA Bills relating to the original work order of 12.10.2018. When an arbitration notice is served in respect of disputes stemming from the original work order and the arbitration notice was issued before the Section 8 demand notice, clearly it signifies that a dispute already existed between the parties.”

It further added that as an arbitration notice is a formal communication from one party to the other, initiating arbitration proceedings, the arbitration notice evidences a pre-existing dispute. This therefore constitutes sufficient ground for rejection of a Section 9 application.

Accordingly, the present appeal was dismissed.

Case Title: R.A.J. KRISHNA CONSTRUCTION COMPANY PRIVATE LIMITED Versus NEWERA SOLUTIONS PRIVATE LIMITED

Case Number: Company Appeal (AT) (Insolvency) No. 83 of 2024

Judgment Date: 8/01/2025

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