Exchange Of Debit Notes And Pending MSME Reference Indicate Plausible Pre-Existing Dispute: NCLT New Delhi

Therefore, the bench held that if the Corporate Debtor raises a plausible contention about a pre-existing dispute, which is not just a moonshine or feeble legal argument, it would suffice for the Adjudicating Authority to reject the application filed under Section 9 of the IBC.

Brief Facts:

Mayfair Biotech Private Limited ('Applicant' or 'Operational Creditor') filed an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) and Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 in which it sought to initiate the Corporate Insolvency Resolution Process (CIRP) against Good Value Chemicals Private Limited ('Respondent' or 'Corporate Debtor'). The Applicant's claim was based on the Corporate Debtor's failure to pay an outstanding amount of ₹2,16,90,392/-.

The Applicant argued that based on an agreement it provided goods and services to the Corporate Debtor. Despite receiving these goods and services, the Corporate Debtor began delaying payments which led to substantial arrears. The Applicant ceased further supply of goods and services due to non-payment and issued numerous reminders all of which were ignored by the Corporate Debtor. Subsequently, the Applicant served a Demand Notice under Section 8 of the IBC and claimed the unpaid debt and interest. The Corporate Debtor's response raised a pre-existing dispute, which the Applicant contended was unfounded. The Corporate Debtor also claimed that a separate demand was made under the Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act) for a lesser amount which the Applicant disputed as incomplete and misleading.

Observations by the NCLT:

The NCLT noted that the Respondent's defense included a debit note which claimed that the quality of raw materials provided by the Operational Creditor was defective and substandard. The debit note stated that previous discussions about the substandard material didn't lead to a resolution, and thus, the Corporate Debtor debited ₹19,98,947/- as compensation for the defective materials.

Further, the NCLT noted that there was a pending reference under Section 18 of the Micro, Small, and Medium Enterprises Development Act (MSME Act) before the Micro and Small Enterprises Facilitation Council, Himachal Pradesh. This reference, initiated on August 13, 2019, sought recovery of ₹1,04,71,053/- from the Corporate Debtor. This was prior to the issuance of the demand notice on December 21, 2019.

The NCLT noted that according to Sections 17 and 18(1) of the MSME Act, any dispute regarding payment for goods or services can be referred to the Micro and Small Enterprises Facilitation Council overriding other laws.

The bench also referred to the case of Mobilox Innovations Private Limited v. Kirusa Software Private Limited where the Supreme Court clarified that if there is a plausible contention of a dispute, the adjudicating authority must reject the application under Section 9(5)(2)(d) of the IBC. The Supreme Court held that the adjudicating authority should reject the application if there is a factual dispute or ongoing arbitration proceeding without assessing the merits of the dispute.

Therefore, the NCLT held that the existence of debit note and the pending MSME reference demonstrated a plausible pre-existing dispute. It held that the disputes related to the agreed services existed before the demand notice was issued.

Consequently, the NCLT held that the Applicant failed to meet the requirements for initiating the Corporate Insolvency Resolution Process under Section 9 of the IBC against the Respondent. Therefore, the application was rejected.

Case Title: Mayfair Biotech Pvt. Ltd Vs Good Value Chemicals Pvt. Ltd

Case Number: C.P (IB)/215(ND)2020

For the Applicant : Mr. Rajesh Agrawal, Adv

For the Respondent : Mr. Ajay Singh, Adv

Date of Judgment: 11.07.2024

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