NCLAT set aside the order initiating the Corporate Insolvency Resolution Process, releasing the corporate debtor from the process, while clarifying the standards for admitting operational debt disputes.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench led by Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member) reviewed an appeal and observed that for the admission of a Section 9 application under the Insolvency and Bankruptcy Code, the absence of a pre-existing dispute regarding the operational debt must be clearly demonstrated, and any acknowledgement of debt must be weighed against genuine disputes raised prior to the demand notice. The NCLAT found that the Adjudicating Authority failed to adequately consider these disputes, leading to the erroneous admission of the CIRP.
In the recent NCLAT judgment regarding the appeal filed under Section 61 of the Insolvency and Bankruptcy Code, 2016, the court addressed the case of a Suspended Director of M/s Schneider Prototyping India Pvt. Ltd. challenging the NCLT's order that had admitted a Section 9 application from Operational Creditor Shri Pawan Gaur, thereby initiating the Corporate Insolvency Resolution Process (CIRP) on October 31, 2023. The Appellant's counsel argued that an Employment Agreement with the Respondent had lapsed without formal renewal and cited financial mismanagement as a reason for significant losses. The Respondent's demand notice for salary dues lacked a detailed breakdown, which the Appellant refuted, asserting that overpayments had been made and highlighting unauthorized withdrawals by the Respondent.
The Respondent's counsel countered by claiming that the Appellant had acknowledged debts in the balance sheet and had failed to dispute them under Section 8 of the IBC, maintaining that their claims were legitimate. Upon reviewing the submissions, the NCLAT emphasized the importance of demonstrating the absence of disputes for the CIRP initiation. It reaffirmed the principle established in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, REEDLAW 2017 SC 09545, which necessitates proof of payment or notice of dispute within ten days following a demand for operational debts.
The Adjudicating Authority had confirmed that the corporate debtor acknowledged liabilities exceeding ₹28 lakhs, particularly in relation to salary and provident fund dues. However, the authority found that the corporate debtor did not substantiate claims of set-off nor provide evidence that the debts had been settled, thereby satisfying the operational debt threshold and establishing default. The NCLAT noted that communications indicated the corporate debtor’s acknowledgement of dues amidst ongoing disputes, which were not properly considered by the Adjudicating Authority.
Ultimately, the NCLAT determined that the Adjudicating Authority erred in admitting the Section 9 application, as substantial disputes existed prior to the demand notice, particularly concerning mismanagement claims. The court set aside the order initiating the CIRP, releasing the corporate debtor from the process, while ensuring that the Resolution Professional's fees were covered. It permitted the Respondent to pursue alternative legal remedies as necessary, allowing the appeal without costs. This case underscores the critical need for precise documentation and the careful assessment of pre-existing disputes in the context of operational debts under the IBC framework.
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