Defences Of ‘Pre-Existing Dispute’ Or ‘No Amount Due’ Can Be Raised Directly In Reply To Section 9 Application: NCLAT Delhi

Background Facts

Greymatter Entertainment Pvt. Ltd. (“Operational Creditor”) provided services of Live TV Production of Season-1-3 of the Pro Wrestling League (PWL) held in India in 2015 to Pro Sportify Pvt. Ltd. (“Corporate Debtor”). In view of the same, a Live Production Agreement dated 29.01.2016 was entered into between the Parties. The Corporate Debtor allegedly failed to make payment for three seasons of PWL to the Operational Creditor.

On 20.09.2018 the Operational Creditor issued a Demand Notice under Section 8 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) to the ‘Corporate Debtor’, claiming a sum of Rs. 65,41,590/-. The Corporate Debtor did not respond to the notice.

Therefore, the Operational Creditor filed an application under Section 9 of IBC, seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor. On 27.07.2021 the Adjudicating Authority dismissed the application.

The Operational Creditor filed an appeal before NCLAT challenging the order dated 27.07.2021. It was argued that once a Corporate Debtor receives the Demand Notice, it must bring to the notice of Operational Creditor, either the ‘Existence of Dispute’ or the payment of unpaid ‘Operational Debt’. In absence of any response to the Demand Notice, the Corporate Debtor cannot directly raise these defences in Reply to Section 9 Application. Therefore, the Adjudicating Authority erred in rejecting the application.

NCLAT Verdict

The Bench observed that Section 8 & 9 of IBC indicate that in event Reply to Demand Notice has not been filed within 10 days, the Corporate Debtor is precluded from raising the question of dispute or pleading that there or no amount due and payable. However, the Corporate Debtor is not prevented from establishing by way of a Reply and relevant documents any Pre-Existing Dispute or paid Operational Debt. The Bench placed reliance on NCLAT judgment in M/s. Brandy Realty Services Ltd. v M/s. Sir John Bakeries India Pvt. Ltd., Comp. App. (AT) (Ins.) No. 958/2020, wherein it was held:

“We thus are of the considered opinion that mere fact that Reply to notice under Section 8 (1) having not been given within 10 days or no reply to demand notice having been filed by the Corporate Debtor does not preclude the Corporate Debtor to bring relevant materials before the Adjudicating Authority to establish that there are preexisting dispute which may lead to the rejection of Section 9 application.”

The Bench held that the dispute raised by the Corporate Debtor in its Reply to Section 9 application were not spurious in nature. Accordingly, the Bench upheld the Adjudicating Authority’s order and dismissed the appeal.

Case Title: Greymatter Entertainment Pvt. Ltd. v Pro Sportify Pvt. Ltd.

Case No.: COMPANY APPEAL (AT) (INSOLVENCY) NO. 1043 of 2021

Counsel For Appellant: Mr. Kuriakose Varghese, Ms. Aishwarya Hariharan & Mr. Akshat Gogna, Advocates.

Counsel for Respondent: Mr. Arvind Nayar, Sr. Advocate with Mr. Varun Tankha, Mr. Akshay Joshi and Mr. Prannoy Joe Sebastian, Advocates.

Click Here To Read/Download Order