The NCLAT Chennai Bench set aside the NCLT's admission of the Section 9 application due to the establishment of a pre-existing dispute.
The National Company Law Appellate Tribunal (NCLAT), Chennai Bench comprising Justice Sharad Kumar Sharma (Judicial Member) and Technical Member Mr. Jatindranath Swain reviewed an appeal and held that the insolvency proceedings cannot be initiated under Section 9 of the Insolvency and Bankruptcy Code (IBC) if there is a pre-existing dispute between the parties evidenced by communications prior to the demand notice, and the application must be dismissed in such cases. The Court emphasizes that the existence of a bona fide dispute must be established before admitting a petition for insolvency.
The Appellant, a suspended Director of M/s Servomax Limited, challenged the impugned order of the NCLT, Hyderabad Bench dated 22.02.2024. He had contended that the Section 9 application filed by the Operational Creditor, TVN Enterprises, should not have been admitted, as the outstanding operational debt of Rs.1,00,49,270 did not satisfy the threshold requirement once the invoices falling due during the period from 25.03.2020 to 25.03.2021 were excluded under Section 10A of the I&B Code. M/s Servomax Limited, incorporated on 08.11.2017 and engaged in manufacturing transformers, had maintained a longstanding business relationship with TVN Enterprises, which involved numerous transactions where payments for supplied goods remained partially outstanding.
The Appellant argued that only one invoice, raised on 13.02.2020 for Rs.2,86,994, fell outside the Section 10A period and that his repeated disputes regarding the quality of goods and subsequent settlement efforts underscored a pre-existing dispute that should bar insolvency proceedings. In contrast, the Operational Creditor maintained that the default originated on 14.03.2020, continued unabated during and beyond the Section 10A period and that the Corporate Debtor had unequivocally acknowledged the outstanding debt through its statement of accounts and other communications. The Adjudicating Authority had admitted the Section 9 petition on the grounds that the undisputed debt was due and payable, noting that the default, which commenced prior to the Section 10A period, continued during the prohibited period, thereby justifying the inclusion of the invoices in the debt computation.
The NCLAT, however, concluded that the 27 invoices falling due during the Section 10A period were barred from being aggregated with the pre-Section 10A default, leaving only an amount of Rs.2,86,762 from the pre-Section 10A period, which did not meet the Rs.1 crore threshold required for initiating CIRP proceedings. The Court holds that while the underlying debt remains recoverable by the Operational Creditor through alternative legal avenues, it cannot serve as the basis for insolvency proceedings under the I&B Code. Consequently, the NCLAT allowed the Company to Appeal and set aside the impugned order, thereby closing all pending interlocutory applications.
Mr. R Venkatavaradan, Advocate for Mr. Saai Sudharsan, Advocate represented the Appellant.
Ms. Himangini Sanghi, Advocate appeared for Respondent No. 1.
Subscribers can access the Case, including Case Analysis, Ratio Decidendi, Headnotes, Briefs, Case Research, Cited Case Laws, Case Law Cross-references, and the latest updates on Statutes, Notifications, Circulars, Guidelines, Press Releases and more.
Click on the Citation/Link to access these resources
Comments