2018 (6) TMI 490 - AT - Insolvency and Bankruptcy

Corporate Insolvency Resolution Process - whether unilateral transfer of liability does not constitute a dispute within the meaning of Section 5(6) of the I&B Code ? - Held that - Insolvency application under Section 9 was filed on 20th February 2017 and no reply was filed within the stipulated period of ten days. The notice of dispute under Section 8(2) was issued on 2nd March 2017 which cannot be taken into consideration to hold that there was existence of dispute . The Operational Creditors have brought to the notice of the Adjudicating Authority the copies of Commercial Tax (Sales Tax) monthly returns of the Corporate Debtor . The Corporate Debtor has taken plea before the Commercial Tax Department Kanpur that during the relevant period supplies were made by the Operational Creditors and thereby acknowledged the purchase made in their monthly tax returns. On the basis of such the Corporate Debtor having already taken input tax credit from the Tax Department now cannot take plea that the Corporate Debtor do not owe any debt to the Operational Creditors . No merit in these appeals.

Summary

Issues:
- Admittance of liability by the Corporate Debtor to Operational Creditors
- Novation of contract between Corporate Debtor and Mr. Dinesh Arora
- Dispute resolution between parties
- Transfer of liability and debt

Admittance of liability by the Corporate Debtor to Operational Creditors:
The judgment revolves around appeals by a common Appellant, the Director/Shareholder of the Corporate Debtor, against an order passed by the Adjudicating Authority admitting applications under Section 9 of the Insolvency and Bankruptcy Code by five Operational Creditors. The Operational Creditors alleged non-payment despite admitting liability by the Corporate Debtor. The Appellant claimed that a novation of the contract occurred, making the sums recoverable only from Mr. Dinesh Arora, not the Corporate Debtor. However, the Operational Creditors disputed this claim, stating they were not party to any such agreement.

Novation of contract between Corporate Debtor and Mr. Dinesh Arora:
The Appellant argued that a novation of the contract occurred, shifting liability from the Corporate Debtor to Mr. Dinesh Arora. The Appellant contended that all parties were in agreement regarding this novation. However, the Operational Creditors disputed this, stating they were not part of any Memorandum of Understanding between the Corporate Debtor and Mr. Dinesh Arora.

Dispute resolution between parties:
The judgment highlighted the absence of a pre-existing dispute between the Corporate Debtor and the Operational Creditors. It emphasized that a unilateral transfer of liability does not constitute a dispute under the Insolvency and Bankruptcy Code. The court found no privity of contract between the Operational Creditors and Mr. Dinesh Arora, emphasizing that the Corporate Debtor remains liable to the Operational Creditors.

Transfer of liability and debt:
The judgment clarified that the alleged Memorandum of Understanding, not signed by the Operational Creditors, did not absolve the Corporate Debtor of its liability. The court emphasized that the Corporate Debtor, as a separate corporate entity, could not transfer its debt liability to a third party. The court dismissed the appeals, stating that the Corporate Debtor's acknowledgment of debt in tax returns prevented denial of payment to the Operational Creditors.

In conclusion, the judgment dismissed the appeals, emphasizing the Corporate Debtor's liability to the Operational Creditors despite claims of novation of contract and transfer of liability to a third party. The court highlighted the importance of privity of contract and the absence of a pre-existing dispute in resolving insolvency cases.