NCLAT upheld the dismissal of the Section 9 application, ruling that pre-existing disputes barred the initiation of the Corporate Insolvency Resolution Process (CIRP).
The National Company Law Appellate Tribunal (NCLAT), Principal Bench led by Justice Ashok Bhushan (Chairperson) and Technical Members Mr. Barun Mitra and Mr. Arun Baroka reviewed an appeal and upheld the dismissal of the Section 9 application on the grounds that a substantial and bona fide pre-existing dispute regarding defective goods existed prior to the issuance of the demand notice, thus barring the initiation of the Corporate Insolvency Resolution Process under the IBC.
The NCLAT considered an appeal filed under Section 61(1) of the Insolvency and Bankruptcy Code, 2016, challenging the Impugned Order dated 01.05.2024, which dismissed a Company Petition filed by the Appellant, an Operational Creditor, under Section 9 of the IBC. This petition sought to initiate the Corporate Insolvency Resolution Process (CIRP) against the Respondent, a Corporate Debtor, based on an outstanding debt that was contested due to a pre-existing dispute. The Appellant had a long-standing relationship with the Respondent, supplying goods since May 2007. However, the dynamics shifted following a merger in 2015, and no transactions took place until 2018, when an outstanding debt of Rs. 90,16,311.65 remained, which included dues owed to both the Appellant and Sumo Metallic Private Limited, the merged entity.
Despite the Respondent admitting to a debt of Rs. 47,26,700.65 in October 2018, the payments made were insufficient to clear the outstanding balance. Between May and September 2019, the Respondent ordered goods from the Appellant, leading to further invoices totaling Rs. 2,24,67,913, with an outstanding balance of Rs. 1,39,41,382 remaining unpaid. A demand notice issued by the Appellant on 07.12.2021 for Rs. 2,10,09,089.11 was met with the Respondent alleging defects in the supplied goods under two invoices, prompting the Respondent to file a title suit on 24.12.2021 to assert a pre-existing dispute. The Appellant viewed this legal action as an attempt to evade payment.
On 25.05.2022, the Appellant filed the Company Petition for the alleged default amount, while the Respondent simultaneously contested these claims, asserting full payment had been made and that defects in the goods warranted no further financial obligation. During this period, HDFC Bank initiated a separate CIRP against the Appellant under Section 7 of the IBC. The Adjudicating Authority approved a resolution plan for the Appellant on 01.01.2024 but subsequently dismissed the Company Petition on 01.05.2024, citing the existence of a pre-existing dispute due to the pending civil suit concerning the invoices raised in 2019.
In its examination, the NCLAT acknowledged that the Respondent's reply to the demand notice confirmed the non-conformity of the goods supplied. The NCLAT emphasized that the disputes over defective goods were raised before the demand notice and were substantial enough to bar the initiation of CIRP under Section 9. Citing the Supreme Court ruling in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, REEDLAW 2017 SC 09545, the NCLAT underscored the necessity of establishing a real, substantial, and bona fide dispute prior to the issuance of the demand notice, leading to the conclusion that the Adjudicating Authority acted correctly in dismissing the application. Consequently, the NCLAT upheld the dismissal of the appeal and the Section 9 application without ordering costs.
Mr. Vibhor Kappor, Mr. Sujoy Datta, Ms. Mahima Shekhawat and Ms. Avani Sharma, Advocates rep[resented the Appellant.
Ms. Neha Somani, Pr. C.S. and Mr. Shashank Agarwal, Advocate appeared for the Respondent.
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