NCLT Hyderabad Rejects Application U/S 9 Of IBC Filed By M/s Isthara Parks Private Ltd On Grounds Of Pre-Existing Dispute
Mohd Malik Chauhan
6 Feb 2025 1:50 PM
The NCLT Hyderabad Bench of Shri Rajeev Bhardwaj (Judicial Member) and Shri Sanjay Puri (Technical Member) has held that once a prima facie case of a genuine pre-existing dispute is made out prior to issuance of demand notice under Section 8(1) of the IBC, the Adjudicating Authority must reject an application filed by Operational Creditor under Section 9 of the Code. Brief...
The NCLT Hyderabad Bench of Shri Rajeev Bhardwaj (Judicial Member) and Shri Sanjay Puri (Technical Member) has held that once a prima facie case of a genuine pre-existing dispute is made out prior to issuance of demand notice under Section 8(1) of the IBC, the Adjudicating Authority must reject an application filed by Operational Creditor under Section 9 of the Code.
Brief Facts
M/s Isthara Parks Private Limited (Operational Creditor/Petitioner) undertakes the business of operating hostel facilities and providing catering and food services.
M/s Valmar Projects LLP (Corporate Debtor/ Respondent) is engaged in the business of maintaining, managing, supporting, and servicing educational services.
Petitioner entered into a Facilities Service Agreement (“FSA”) with the Respondent to provide operating hostel facilities, including housekeeping services on 23.02.2022
The petitioner and the respondent also executed a Catering Service Agreement (“CSA”) on 16.03.2022 to provide food and catering services to day scholars and hostel residents. Both these agreements came into effect in April 2022.
Subsequently, an application under section 9 of the code was filed by the operational creditor claiming unpaid amount.
Contentions:
The petitioner submitted that the Respondent violated the agreement by failing to clear invoice amounts within the stipulated time.
It was also submitted that the Respondent has breached the contract by taking the entire supporting staff of the Petitioner, which is highly deprecated and uncalled for. Further, cooking equipment etc., were also forcibly retained by the Respondent.
Lastly, it was submitted that despite being asked to make the payment of the remaining amount, the Respondent has not paid any heed, but has admitted its liability to pay the amount of Rs.4,80,64,953/- till June, 2023.
Per contra, the respondent submitted that there is no operational debt within the meaning of Section 5(21) of the IBC, and the Petitioner has withheld and suppressed details of pre-existing disputes between the parties.
It was also argued that deficiencies in services were first brought to the Petitioner's attention within 2-3 months of the agreement's execution via emails dated July 11, 2022 and August 2, 2022' but the Petitioner failed to address said deficiencies even after giving assurances on multiple calls & meetings.
It was further contended that as a result of such deficiencies, Respondent suffered loss of reputation and an attrition by students of the mess facilities.
Observations:
The tribunal at the outset referred to the Supreme Court judgment in Mobilox Innovations Private Limited vs. Kirusa Software Private Limited (2018) wherein it was held that all that the adjudicating authority is supposed to determine at this stage is whether there is a plausible contention with respect to pre-existing dispute requiring further investigation. It need not concern itself with whether the contention would succeed. Instead, it has just to determine whether a plea of pre-existing dispute is supported by documentary evidence.
The court further observed that “the Court does not at this stage examine the merits of the dispute except to the extent indicated above. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application.”
It also referred to the NCLAT judgment in 'Rajratan Babulal Agarwal vs. Solartex India Pvt. Ltd. and Ors. (2023)' where it was held that the defence of Corporate Debtor need not be judged on the principle of Preponderance of Probability, neither should the tribunal delve into the merits of the dispute nor the likelihood of the defence to succeed.
The tribunal noted that the NCLAT in 'Sanjay Kumar, Designated Partner of Kapasi Infracon LLP vs. Gannon Dunkerley and Co. Ltd. (2024)' held that pre-existing dispute qualifies a pre-existing dispute to be a defence which is not spurious, mere bluster, plainly frivolous or vexatious. For arriving at this conclusion, the adjudicating authority is not required to sift the evidence like in a civil case.
It also referred to the NCLAT judgment in 'Aalborg CSP A/S versus Solar Atria Cleantech Private Limited (2020)' where it was held that it is duty of the Adjudicating Authority to see whether there is 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 applying ratio to the facts of the present case, the tribunal noted that repeated complaints were made by the Respondent, from the commencement of the contracts until their termination on 23.05.2023.The complaints included poor housekeeping services, insufficient manpower provided by Petitioner, inadequate and sub-standard food quality.
The tribunal on a careful perusal of the FSA & CSA executed between the parties noted that, a clear connection between the responsibilities owed by the Petitioner and the deficiencies alleged by the Respondent on part of Petitioner was made out.
Assessing the genuineness of the pre-existing disputes, the tribunal also noted that the Respondent had promptly brought the disputes and grievances to light after entering the contract and that the Petitioner had failed in its responsibility to fulfil its obligations as noted under the FSA & CSA which further resulted in reputational damage for the Respondents and an exodus of students from the hostel.
It further observed that “although the ledger account reflects a liability and the Respondent has expressed readiness to settle accounts, this does not negate the existence of genuine disputes regarding service quality and other related issues.”
The tribunal concluded that “these complaints, substantiated by documentary evidence, demonstrate the existence of a genuine pre-existing dispute. Therefore, under Section 9(5)(ii)(d) of the IBC, this Authority is precluded from admitting the Petitioner's application.”
Accordingly, the present application was rejected.
Case Title: M/s.Isthara Parks Private Limited v M/s.Valmar Projects LLP & Ors.
Case Number: CP (113) No.216/9/IIDB/2023
Date of Order: 29.01.2025
For Petitioner: Dr P Bhaskara Mohan and Mr. PSDS Kaartheik, Advocates.
For Respondents: Mr.A Venkatesh Sr.Advocate ,Mr Sai Sanjay Suraneni, Advocate.
Singhania &Co (Mr.Rohit jain,Mr.Aslam Ahmed)