2020 (1) TMI 1497 - AT - Insolvency and Bankruptcy

Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Operational Creditors - pre-existing dispute or not - Service of demand notice - HELD THAT - The demand notice under Section 8(1) was issued by the Operational Creditor on 10th June, 2017, the email dated 30th September, 2016 is much prior to demand notice, which shows that quality material was not supplied and it was substandard. Though by letter dated 14th February, 2017, the Corporate Debtor has said that they will make payment but letter dated 10th July, 2017 shows that sales proceeds could not be realized by the Corporate Debtor because they faced lot of problems in the material supplied by the Operational Creditor for bad quality and short supply. In the present case there being a pre-existing dispute relating to quality of product supplied by the Operational Creditor referred in the email dated 30th September, 2016, the Adjudicating Authority without deciding the issue whether it was accepted to pay the amount or not is not competent to admit application under Section 9, there being a pre-existing dispute. The case is remitted to the Adjudicating Authority to decide the fee and cost incurred by the Interim Resolution Professional and to decide about the person who will pay the amount, preferably within three weeks - Appeal allowed.

Summary

Issues:
1. Challenge to initiation of Corporate Insolvency Resolution Process under Section 9 of the Insolvency and Bankruptcy Code, 2016 based on pre-existing dispute.

Analysis:
The judgment revolves around an application filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 by an Operational Creditor against a Corporate Debtor. The challenge to the initiation of the Corporate Insolvency Resolution Process is based on the existence of a pre-existing dispute between the parties. The Appellant, who is a Shareholder, argued that faulty materials were supplied by the Operational Creditor, citing an email dated 30th September, 2016, and other documents to support this claim. On the other hand, the Respondent, represented by the Operational Creditor, referred to a Letter of Guarantee dated 14th February, 2017, where the Corporate Debtor confirmed payment without any objection and delay. Additionally, reliance was placed on a Letter dated 10th July, 2017, indicating the Corporate Debtor's willingness to pay the dues, and an email dated 18th July, 2017.

The Tribunal analyzed the sequence of events and documents presented by both parties. It was noted that the demand notice under Section 8(1) was issued by the Operational Creditor on 10th June, 2017, while the email dated 30th September, 2016, which highlighted the issue of substandard quality material, predated the demand notice. The Tribunal observed that even though the Corporate Debtor had indicated willingness to make payment in the past, they faced difficulties in realizing sales proceeds due to problems with the material supplied by the Operational Creditor, as mentioned in the letter dated 10th July, 2017.

The judgment emphasized that the Adjudicating Authority could not adjudicate the claim or counterclaim in an application under Section 9 of the I&B Code if it was not a Court of competent jurisdiction. It was crucial to ascertain the presence of a dispute prior to the issuance of the demand notice under Section 8(1). In this case, the existence of a pre-existing dispute regarding the quality of the product supplied by the Operational Creditor, as evidenced by the email dated 30th September, 2016, led the Tribunal to conclude that the Adjudicating Authority was not competent to admit the application under Section 9. Consequently, the impugned order initiating the Corporate Insolvency Resolution Process was set aside, and the application under Section 9 filed by the Operational Creditor was dismissed.

As a result of the judgment, the Corporate Debtor was released from the Corporate Insolvency Resolution Process and permitted to function through its Promoters and Directors. The Interim Resolution Professional was directed to hand over the assets and records to the Promoter/Directors promptly. The case was remitted to the Adjudicating Authority to determine the fees and costs incurred by the Interim Resolution Professional and decide on the party responsible for payment, preferably within three weeks. The appeal was allowed with the mentioned observations and directions, with no costs imposed.