Once Plausibility Of Pre-Existing Dispute Is Established, Application U/S 9 Of IBC Must Be Rejected: NCLAT

Brief Facts

This appeal has been filed under section 61 of the Code challenging an order passed by the NCLT by which an application under section 9 of the Code was dismissed on the ground of pre-existing dispute.

The corporate debtor entered into a contract with the government of Bihar under which it undertook to set up pump sets at various locations in Bihar. In pursuance of the contract, the corporate debtor placed purchase orders on the operational creditor for pump sets. The pump-sets were issued by the operational creditor against which invoices were raised. The corporate debtor defaulted in making the payment. Thereafter, the operational creditor sent a demand notice and when no reply was given to the notice, an application under section 9 of the IBC was filed which was rejected by the NCLT. The Impugned order has been assailed in this appeal.

Contentions

The Appellant submitted that the pump sets were supplied after a verification done by a third party. The delivery of the sets were taken without raising any objection. Even the bills raised against supply of the said material were also accepted by the corporate debtor.

It was further submitted that there is no genuine foundation of pre-existing dispute since all the pump sets were supplied after third party inspection which agency had certified the goods at the time of dispatch therefore the Adjudicating Authority committed error in rejecting the application on the basis of an email of 07.01.2020 and minutes of a meeting held on 26.01.2021.

Per contra, the Respondent submitted that the Corporate Debtor had sent their reply to the Section 8 demand notice on 18.09.2020 and this Notice of Dispute clearly articulated the aspect of delayed supply of goods and supply of defective goods by the Appellant and the consequential adverse impact on the goodwill and reputation of the Corporate Debtor.

It was further submitted that operational creditor was duly informed via an email dated 07.01.2020 that the solar pump- systems supplied by them were not working and were asked to take necessary corrective action. However, the Operational Creditor failed to redress the defects which in turn led to a backlash from the Government of Bihar leading to termination of the contract and blacklisting of the Corporate Debtor.

It was further submitted that WhatsApp messages and email of 07.01.2020 by the Corporate Debtor highlighting the ongoing dispute preceded the Section 8 demand notice clearly demonstrated pre-existing disputes.

It was also submitted that a meeting was conducted between the parties in which the operational creditor undertook to replace the defective pump sets and also promised to withdraw the section 9 application. However the operational creditor later refused to withdraw the application for which an application under section 65 was filed for fraudulent initiation of CIRP.

Issue Before NCLAT

Whether there is any infirmity in the impugned order passed by the Adjudicating Authority dismissing the Section 9 application on the ground that the operational debt claimed by the Appellant was embedded with pre-existing disputes.

NCLAT's Analysis

The tribunal, at the outset, discussed the scheme of the IBC when an insolvency application is filed by the operational creditor. Section 8 of the code provides that a demand notice requires to be sent to the corporate debtor once it becomes clear that the a default has been committed. A reply to the said notice has to be given within 10 days in which a dispute as to the claim can be raised.

Section 9 of the code further provides that if neither the payment nor notice of dispute is received from the corporate debtor, insolvency application under this section can be filed. However, if a notice of dispute is received by the Operational Creditor or there is a record of dispute in the Information Utility, the application is liable to be rejected by the Adjudicating Authority.

In Mobilox Innovations Private Limited v. Kirusa Software Private Limited, 2017 the Supreme Court has laid down the test for rejecting or accepting the application was under section 9 of the code. The court has held that “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.”

The Adjudicating Authority had gone through the whatsapp messages and rejected them as they were not reliable piece of evidence for demonstrating that there existed a pre-existing dispute between the parties. This approach of the Adjudicating Authority cannot be faulted.

However, the Adjudicating Authority had perused the email dated 07.01.2020 sent by the corporate debtor and come to the conclusion that it evidenced a pre existing dispute between the parties. In the email, it was clearly communicated to the operational creditor that the solar based pump sets were not working properly and the Government had refused to release the funds if the pump sets were not properly installed. This email was sent prior to the demand notice being issued by the operational creditor.

This manifested a clear case of a pre-existing dispute which could not be enquired into by the Adjudicating Authority at that stage as it required to be investigated by a proper forum therefore no error was committed by the Adjudicating Authority in rejecting the application on this ground.

The tribunal also observed that the argument was raised by the appellant that third party inspection was conducted before installing the pump-sets therefore no fault was committed by the operational creditor. However, this contention was rejected on the ground that the inspection was only conducted when the pump-sets were sent in boxed condition and not after the pump sets were installed. The pump sets should have been inspected in running condition. On top of that, it was also observed that no evidence was presented to show that any modalities for inspecting the pump-sets were agreed upon by all the parties. It was a unilateral act of the operational creditor.

Based on this, the tribunal observed that in such circumstances, it cannot be said that the defence raised by the Corporate Debtor therefore cannot be held to be moonshine, spurious, hypothetical or illusory.

The dispute continued to fester is also evident by the fact that a meeting dated 26.01.2021 was held between the parties in which the operational creditor agreed to rectify the defects in the installed pump-sets. It is also an admission on the part of operational creditor that obligations under the contract were not discharged therefore it cannot be said that all the obligations stood discharged and disputes settled just because a meeting was convened in which promise to overcome the shortcomings in meeting the obligations was made.

Accordingly, the present appeal was dismissed.

Case Title: M/s. Kashyap lnfraprojects Pvt. Ltd. Versus M/s. Hi-Tech Sweet Water Technologies Pvt. Ltd.

Case Reference: Company Appeal (AT) (Insolvency) No. 33 of 2023

Judgment Date: 27/11/2024

Click Here To Read/Download The Order